Category: Insight

(Bloomberg)  High Yield Market Highlights

• US junk-bond yields surged to seven-month highs as risk premiums rose to levels not seen since August, driving the biggest one-day loss since December, amid the escalating trade war after Donald Trump threatened more tariffs on European exports.
• The risk premium for junk bonds, as reflected in spreads, closed at 335 after widening 22 basis points on Thursday, the biggest move in seven months.
• Credit spreads are not pricing in enough risk, Barclays strategists Brad Rogoff and Dominique Toublan wrote on Friday. Barclays revised its spread forecast for 2025 to 400-425 basis points versus its earlier forecast of 275-300 basis points
• As junk bonds plunged, yields jumped the most in seven months to close at 7.67%.
• Amid tumbling bond prices, rising yields and widening spreads, the primary market stalled on Thursday as US borrowers remained on the sidelines. Just $4b was priced this week compared with $8b last week
• The losses in the junk-bond market extended across ratings. CCCs, the riskiest segment, suffered the worst losses since last summer.
• CCC yields approached 11% on Thursday, rising 28 basis points. Yields were at a new six-month high
• BB spreads closed at 213, also a seven-month high. Yields closed at 6.44%, a two-month high. BBs racked up a loss of 0.33% on Thursday, the biggest one-day loss this year

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

(Bloomberg)  High Yield Market Highlights

• US junk bond racked up the biggest one-day loss in nearly eight weeks on Thursday as equities plunged. High-yield markets, which have been jittery amid evolving headlines over US tariffs, are on track for their biggest weekly loss since mid-December.
• Spreads surged to a near five-month high after jumping 11 basis points on Thursday and closing in on 300 basis points, the most in two months.
• Yields rose by nine basis points to a three-week high of 7.30%, the biggest one-day jump in seven weeks
• The losses spanned across ratings; CCC yields soared to a 7-week high of 10.18%, rising by 17 basis points, driving a loss of 0.33% on Thursday; CCCs are headed for their worst week in 10 months
• CCC spreads climbed to a more than four-month high of 587, rising by 19 basis points, the biggest one-day widening since September
• BB spreads widened 9 basis points to 185 and yields advanced to a three-week high of 6.21%
• While there was a selloff in equities amid policy uncertainty, the US junk bond primary market continued at a steady pace
• 10 borrowers sold debt this week; 2 borrowers sold more than $2b on Thursday driving the week’s supply to more than $8b
• 8 of the 10 companies sold bonds with BB ratings, the best credit quality in the high-yield universe

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

(Bloomberg)  High Yield Market Highlights

• US junk bonds defied policy uncertainty, elevated volatility, and tumbling equities as they headed for their second monthly gain this year, with modest returns of 0.6%. Yields also declined for the second consecutive month, falling six basis points to 7.14%.
• The broad gains in the US junk bond market extended across all ratings. The rally was partly fueled by light supply. The year-to-date volume is at $40b, down 31% from the same period last year. February supply stands at $18b, down 32% from last February.
• The US high yield market shrugged off rising inflation expectations, a sharp decline in home sales, weakening consumer confidence, and repeated assertions by various Fed officials including Chair Powell that the rates are likely to stay higher for longer
• US high yield spreads held firm, widening just 14 basis points so far this month, even though the 10- and 5-year Treasury yields fell 28 and 20 basis points. The 5-year Treasury yield closed at a more than a two-month low, reflecting the flight to safety
• BB spreads, which are the most rate sensitive, widened 17 basis points for the month to 173. Yields fell three basis points to 6.11%, their second monthly decline. The index registered gains of 0.65% in February
• CCCs racked up gains for the 10th straight month, the longest winning streak since June 2021. The gains were modest and the lowest in the US high yield universe. CCC yields jumped to close at 9.88% and spreads widened 35 basis points to close at 553. CCCs have started coming under pressure

(Bloomberg)  Fed’s Favored Inflation Gauge Rises at Mild Pace, Spending Falls

• The Federal Reserve’s preferred measure of underlying inflation rose at a mild pace in January, offering some relief after a string of reports suggested price pressures are heating up again, while consumers pulled back on spending.
• The so-called core personal consumption expenditures price index, which excludes food and energy items, rose 0.3% from December. From a year ago, it increased 2.6%, matching the smallest annual increase since early 2021, Bureau of Economic Analysis data out Friday showed.
• Inflation-adjusted consumer spending fell 0.5%, marking the biggest monthly decline in almost four years amid extreme winter weather after a robust holiday season. The outsize decline in spending was driven by a drop in durable goods purchases, and may raise concerns about the resilience of the US economy.
• Still, Friday’s report also offers some relief on the inflation front after other reports on prices have suggested progress has not only stalled but is now reversing. Fed officials have indicated they need to see a meaningful easing in inflation before they begin lowering interest rates again, especially when they factor in the uncertainty around how President Donald Trump’s policies will impact prices.
• US Treasury yields fluctuated following the release, while stock futures and the dollar remained higher.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

(Bloomberg)  High Yield Market Highlights

• US junk bond yields edged up, looking through trade tariffs noise and mixed earnings, with Walmart posting disappointing forecasts on Thursday. Traders awaited manufacturing PMI data due later today for clues on the interest-rates path.
• Higher yields continued to bring borrowers into the market
• Four companies sold a little more than $3b in just three sessions to drive the month’s volume to $16b
• Spreads remain tight, bolstered by strong technicals and demand for all-in yield, strategists Brad Rogoff and Dominique Toublan from Barclays wrote this morning
• There is a lack of near-term catalyst to materially disrupt credit markets, they added
• Yields closed at 7.20% and spreads at 261 basis points
• CCC yields closed at 9.84% and spreads unchanged at 530

(Bloomberg)  Fed Minutes Signal Officials on Hold Until Inflation Improves

• Federal Reserve officials in January expressed their readiness to hold interest rates steady amid stubborn inflation and economic-policy uncertainty.
• “Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate,” minutes from the Federal Open Market Committee’s Jan. 28-29 meeting showed.
• The minutes, released Wednesday in Washington, said “many participants noted that the committee could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated.”
• Officials held the Fed’s benchmark policy rate in a range of 4.25%-4.5% at that gathering.
• The record of the meeting underscored the cautious approach Fed policymakers are taking after lowering interest rates by a percentage point in the closing months of 2024. Several officials have said they’d like to see inflation cool further toward the Fed’s 2% target before backing another cut.
• Investors are currently pricing in one rate cut in 2025, with the possibility of a second, according to futures markets.
• Policymakers are watching the rollout of Trump’s economic-policy plans and how they might shape the economy. Trump is pushing an agenda that includes an increased use of tariffs on US trading partners and an immigration crackdown, both of which could affect the outlook for inflation, the labor market and economic growth.
• While characterizing risks in the economy as roughly balanced, policymakers “generally pointed to upside risks to the inflation outlook,” the minutes said.
• “Participants cited the possible effects of potential changes in trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household spending,” the minutes showed.
• Still, officials expected that “under appropriate monetary policy” inflation would continue to decline toward their 2% goal.
• Some policymakers also noted that difficulties in fully removing seasonal distortions from inflation data at the start of the year could make the figures “harder than usual to interpret.”

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

(Bloomberg)  High Yield Market Highlights

• US junk bonds snapped back on Thursday, notching the biggest one-day returns in a week after it became clear that reciprocal tariffs were not likely before April. Yields tumbled six basis points to 7.26%.
• The gains spanned across ratings. CCCs, the riskiest part of the high-yield market, racked up gains of 0.22%, the most in three weeks, after yields dropped eight basis points to 9.91%. Risk assets rallied across markets as stocks came close to their all-time highs.
• Undeterred by the heightened volatility and uncertainty around trade policy, bankers led by Morgan Stanley offloaded $4.7b of debt of X Holdings Corp, formerly known as Twitter, at par, tighter than early indications of 98 cents on the dollar. This was the third tranche in two weeks
• The high yield primary market priced two more deals, lifting the month’s supply to $13b
• Persistent yield-driven demand and still-intact fundamentals continue to underpin credit market stability, Brad Rogoff and Dominique Toublan at Barclays wrote on Friday
• Yields and spreads, though, moved in a narrow range this week amid daily uncertainty around tariffs and stubborn inflation data renewing concerns about Fed keeping rates higher for longer, disrupting steady growth

(Bloomberg)  US Inflation Tops Forecasts, Bolstering Case for Fed to Hold

• US inflation picked up broadly at the start of the year, further undercutting chances of multiple Federal Reserve interest-rate cuts this year.
• The monthly consumer price index rose in January by the most since August 2023, led by a range of household expenses like groceries and gas, as well as housing costs. Excluding often-volatile food and energy costs, the so-called core CPI climbed 0.4%, more than forecast, fueled by car insurance, airfares and a record monthly increase in the cost of prescription drugs.
• Inflation tends to come in higher in January, because many companies choose the start of the year to hike prices and fees. That pattern has been exacerbated in the post-pandemic era, and several forecasters suggested that the jump in price growth last month won’t be repeated going forward.
• Still, Wednesday’s report from the Bureau of Labor Statistics serves as further evidence that inflation progress has at least stalled — if not in danger of being reversed. Combined with a solid labor market, it will likely keep the Fed on hold for the foreseeable future. Policymakers are also awaiting further clarity on Trump’s policies.
• “We saw strength across the board — whether you’re looking at energy, food, within core components — and so I think it points to a price environment that still remains difficult as far as the Fed is concerned,” said Sarah House, a senior economist at Wells Fargo & Co. “So for how long you expected the Fed to be on hold going into this report, I think this only lengthens that time frame.”
• Fed Chair Jerome Powell, speaking before the House Wednesday, said the latest consumer price data show that while the central bank has made substantial progress toward taming inflation, there is still more work to do.
• “I would say we’re close, but not there on inflation,” Powell told the House Financial Services Committee in response to a question on the second day of his semi-annual testimony to Congress.
• The January increase in the CPI was led by grocery prices, with two-thirds of that advance due to higher egg prices in the wake of a deadly bird flu outbreak. The more-than 15% jump was the largest since June 2015. Costs of hotel stays and used cars also climbed, possibly in the aftermath of severe wildfires in Los Angeles.
• The report incorporated new weights for the consumer basket to try to more accurately capture Americans’ spending habits, which resulted in minimal revisions to the CPI last year.
• Seasonal adjustments to January data were also minimal, and failed to offset the turn-of-the-year price hikes. As a result, “the sharp increase in the core CPI is less alarming than it first appears,” Sam Tombs, chief US Economist at Pantheon Macroeconomics, said in a note. “We recommend waiting for February’s data, when the new seasonal factors look set to dampen the seasonally adjusted index more than in previous years, before judging how the underlying trend has evolved.”
• Goods costs excluding food and energy rose by the most since May 2023. However, when removing used cars, the index was little changed.
• Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. A separate report Wednesday that combines the inflation figures with recent wage data showed real hourly earnings grew 1% from a year ago.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.