Insight – Cincinnati Asset Management

15 Nov 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads inched wider this week, just off their tightest levels of the year. The Bloomberg US Corporate Bond Index closed at 77 on Thursday November 14 after closing the week prior at 74. The 10yr Treasury moved from 4.30% last Friday to 4.43% through Thursday and it is a few basis points higher this Friday morning as investors continued to digest comments from Jerome Powell late Thursday afternoon that indicated that the Fed was in no hurry to raise its policy rate, casting some doubt on a cut at the December 17-18 meeting. Through Thursday, the corporate bond index year-to-date total return was +2.41%. The yield to maturity for the IG corporate bond index closed at 5.25% on Thursday.

Economics

This was the busiest week for economic releases in some time. The bond market was closed on Monday and Tuesday was quiet but things started to pick up on Wednesday with a CPI print that came in line with economist forecasts resulting in a subdued market reaction. On Thursday, PPI came in slightly higher than expected. Friday brought a very solid retail sales print for the month of October with a sharp revision upward for the September, sparking a modest sell-off in the Treasury market. As we discussed earlier in this note, Fed Chair Powell spoke in Dallas Thursday afternoon and he gave plenty of lip service to data dependency between now and the next FOMC rate decision on December 18. This has cast some doubt on the prospect of a rate cut at the next meeting and futures were pricing in a 62.4% probability of a cut at the end of trading on Thursday. This number had been as high as 82.5% just a day earlier. Next week is extremely light on the economic front domestically but there are CPI data releases in the UK and Japan. While foreign CPI is not particularly meaningful for our markets in a vacuum, they are instructive prints for the direction that those central banks may take with regard to their policy rates, which can impact the relative value of U.S. Treasuries in a global context.

Issuance

It was the busiest week for investment grade issuance in 2 months as borrowers priced almost $46bln of new debt. The total for 2024 has now eclipsed $1.4 trillion, well ahead (+28%) of 2023’s pace. Next week, syndicate desks are looking for $20-$25bln of new supply.

Flows

According to LSEG Lipper, for the week ended November 13, investment-grade bond funds reported a net outflow of -$0.444bln. This outflow broke a streak of 15 consecutive weeks of inflows. Total year-to-date flows into investment grade funds were +$70.7bln.

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.

15 Nov 2024

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

The US junk bond market halted the post-election rally and recorded losses for three straight sessions as yields jumped nine basis this week to 7.21%. The market is on track to end a two-week rally, with the week-to-date loss at 0.16%.
The rally lost further momentum after Chair Jerome Powell suggested that the Federal Reserve is in “ no hurry to lower rates.” The US economic performance has been “remarkably good,” he said, signaling that the central bank had enough room to lower rates at a careful pace.
This came after data showed a measure of US inflation remained firm in October, highlighting the risks the central bank faces in bringing prices under control
Inflation data was followed by producer prices on Thursday. The US producer price index rose in October, signaling pressure in Fed’s favored gauge – the core PCE
The losses in the US junk bond market spanned across ratings. CCC yields climbed 12 basis points to 10% in three sessions this week, driving a loss of 0.02% on Thursday. CCCs are set to close the week flat
BB yields rose eight basis points 6.15% pushing a loss of 0.03% on Thursday. BBs are set to close the week with losses of 0.19%
Risk assets took a breather from the broad post-election rally this week, Brad Rogoff and Dominique Toublan wrote on Thursday. With few data points left and limited days for more supply, spreads can still grind tighter through year-end, despite being near 30-year lows, Rogoff and Toublan wrote
The losses in risk accelerated with Powell’s warnings coming after several Fed officials on Wednesday suggested that there was lack of clarity on the pace of easing and the appropriate level
“While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle,” Kansas City Fed President Jeff Schmid said in a speech at an energy conference co-hosted by the Kansas City and Dallas reserve banks
Uncertainty about the neutral rate has also risen, perhaps because the structural changes in the economy are “relatively recent and will take time to fully assess,” Dallas Fed President Lorie Logan said in separate remarks at the same conference
Junk bond yields and returns also came under pressure this week because US borrowers rushed to the market after a quick and clear election outcome
Eight borrowers sold more than $4b this week

(Bloomberg) Powell Says It’s Smart to Go Slowly on Fed Easing If Data Allow

Federal Reserve Chair Jerome Powell said officials may slow the pace of interest-rate cuts as they approach the so-called neutral rate — a setting that neither slows nor stimulates growth.
The economy is doing very well and that is a great thing, Powell said Thursday during a Q&A session following a speech in Dallas.
“I think in this situation, what it calls for is us to be careful, move carefully, and as we sort of reach the range or get near the plausible range of neutral levels, it may be the case that we slow the pace of what we’re doing just to increase the chances that we get this right,” Powell said.
Powell said it would be smart to proceed slowly with lowering borrowing costs if the economic data allow.
US central bankers began lowering borrowing costs in September with an aggressive half-percentage-point cut, and then lowered the policy rate again by a quarter point last week. They’ve signaled a willingness to cut rates further so long as inflation continues to slow. Powell’s remarks appear in line with some of his other colleagues who are advocating a go-slow approach to future rate reductions.

08 Nov 2024

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds are headed for their second weekly gain after rallying for five straight sessions since Donald Trump won the presidency and Republicans regained control of the Senate. Yields tumbled to a three-week low and are on track for their second weekly decline. Spreads tighten for the fourth consecutive week and hover near a three-year low of 265 basis points.
The gains spanned all risk assets, with equities set for their best week in 2024. S&P 500 notched its 49th record this year sparking a rally across all assets and the VIX index is on track for the biggest weekly decline in three years. CCCs, the riskiest segment of the junk bond market, rose for five sessions in a row and are set to record their second weekly gain.
The broad rally rolled on uninterrupted after the Federal Reserve cut interest-rate by 25 basis points to 4.5%-4.75% as widely expected. The expectations are that the central bank will cut by 25 basis points in the December meeting
CCC spreads closed at 548 basis points, just 5 basis points above the 33-month low of 543. CCC yields fell below 10% again on Thursday to close at 9.94%, the lowest since April, 2022. Yields were down 10 basis points week-to-date
BB spreads are set for their fourth weekly drop after closing at 163. BBs are poised to end their two-week losing streak with gains of 0.4% so far
Single B spreads closed unchanged at 253 basis points, the lowest since the Great Financial Crisis, and yields fell nine basis points to 7.11% driving gains for five days in a row
We expect tighter spreads and compression in the short term, given structurally higher yields, Brad Rogoff and Dominique Toublan wrote this morning. The election’s swift results eased markets’ worst fears and have spurred a widespread risk-on sentiment, they added
The broad rally in risk assets is spurred by expectations that the Republican administration will be less aggressive with anti-trust laws and regulations. The market also expects lower taxes across the board
A clear outcome in the US presidential election ended uncertainty and volatility and reopened the primary market, though cautiously

(Bloomberg) Key Takeaways From Fed Decision to Cut Rate by Quarter Point

Federal Open Market Committee votes unanimously to lower benchmark rate by 25 basis points to target range of 4.5%-4.75%
Fed tweaks language to note “labor market conditions have generally eased,” and repeats “the unemployment rate has moved up but remains low”
Statement removes reference to “further” inflation progress, noting inflation “has made progress toward the committee’s 2% objective but remains somewhat elevated”
Statement removes language saying committee has “gained greater confidence” that inflation is moving sustainably toward 2% target
Statement maintains language saying risks to achieving employment and inflation goals “are roughly in balance”

08 Nov 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads ripped tighter this week. The Bloomberg US Corporate Bond Index closed at 75 on Thursday November 7 after closing the week prior at 83. The index finished Thursday at its tightest level of 2024. The 10yr moved from 4.38% last Friday to 4.33% through Thursday but that does not tell the whole story as the Treasury market was quite volatile this week on the back of Tuesday’s election with most benchmark rates trading in ranges of 20+ bps throughout the week. Through Thursday, the corporate bond index year-to-date total return was +3.19%.

Economics

The election overshadowed what was a reasonably busy week for economic data but none of the prints missed expectations in either direction resulting in little market impact. The FOMC rate decision on Thursday was in line as the central bank delivered a 25bp cut to its policy rate. The Fed meets one more time this year on December 18 and interest rate futures were pricing a 71% chance of a 25bp cut at that meeting as of Thursday evening but there is plenty of data to parse over the next 5 weeks that could change investor opinions. Important potential movers next week are CPI on Wednesday, PPI on Thursday and retail sales on Friday.

Issuance

It was a very slow week for issuance, as expected. There was one $700mm deal priced on Monday and then nothing until Friday morning. With two smaller deals pending on Friday the total issuance tally for the week will likely come in at ~$1.7bln once the dust settles. Next week could see some increased activity if Treasury volatility subsides but the bond market is closed on Monday in observance of Veterans Day and there are still be many companies that are in earnings blackout. These factors could result in a lighter new issue calendar.

Flows

According to LSEG Lipper, for the week ended November 6, investment-grade bond funds reported a net inflow of +$3.3bln. This was the 15^th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$71.1bln.

01 Nov 2024

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bond yields surged to a near-three-month high as the first month of the fourth quarter came to a close amid uncertainty over the path of the interest-rate policy after a string of better-than-expected economic data in October. Yields jumped 34 basis points in October, the most in six months, driving the worst monthly returns since April.
However, CCCs, the riskiest part of the junk bond market, rallied to rack up gains for the sixth month in a row, spurred by strong economic data. Yields tumbled 26 basis points to 10.10%, just three basis points above the 30-month low. CCCs are the best performing asset class in the US fixed-income market.
Spreads have been resilient despite volatility as higher yields fuel strong demand, Brad Rogoff and Dominique Toublan wrote this morning
While recent macro developments have been positive, upcoming catalysts such as the labor report, US elections, and the FOMC meeting may test a credit market, they wrote
BBs, the better-quality credit and most rate-sensitive within the high yield universe, were the worst performers in October, with a loss 0.92%. BB yields climbed to a more than three-month high of 6.24%, up 41 basis points for the month, the most since April
Rising yields were also partly due to a surge in supply in the junk bond market
Tight spreads and attractive yields pulled borrowers into the market in October taking the month’s supply to $24b. It was the busiest October since 2021
Out of the more than 25 borrowers in the market, two used proceeds to fund leveraged buyouts, one funded a dividend payment and two closed strategic acquisitions
CCCs accounted for about 19% of the total volume
One-third of the supply came from BBs

01 Nov 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads moved slightly wider this week but remain just 5 basis points off YTD tights. The Bloomberg US Corporate Bond Index closed at 84 on Thursday October 31 after closing the week prior at 82. The 10yr moved from 4.24% last Friday to 4.28% through Thursday. Through Thursday, the corporate bond index year-to-date total return was +2.77%. The yield to maturity on the corporate index has been boosted in recent weeks by higher Treasury yields and it closed Thursday at a YTM of 5.16%.

Economics

It was a busy week for economic data. The big takeaways were that the consumer is still spending and inflation is still sticky. The payroll report on Friday was a big miss in terms of jobs added but this report was not viewed as all that meaningful due to noise from hurricanes and labor strikes. All told, the data this week pushed Treasury yields slightly higher. As we move ahead to next week all eyes will be on the election on Tuesday which will be immediately followed by a FOMC rate decision on Wednesday afternoon. As we go to print, Fed Funds Futures are pricing in a 98.5% chance that the Fed delivers a 25bp cut.

Issuance

It was a solid week for issuance as IG-rated companies priced just over $27bln in new debt, capping the busiest October since 2021. Next week is likely to see little to no issuance, though it is possible some companies could give the market a look on Monday.

Flows

According to LSEG Lipper, for the week ended October 30, investment-grade bond funds reported a net inflow of +$3.21bln. This was the 14^th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$67.8bln.

25 Oct 2024

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds are headed for their biggest weekly loss in six months as yields surge alongside rise in Treasury yields and 9% loss in equities so far this week. Yields advanced in three of the last four sessions to close at 7.31%, up 15 basis points in four sessions.
Although the broad market recovered modestly on Thursday from the three-day losing streak, it’s on track to register losses across ratings. CCCs are set to post their first weekly loss in more than three months and the biggest since the week ended June 28.
The losses, while partly caused by expectations that the Federal Reserve will have a more measured approach on rate cuts, are also due to a sudden surge in new bond sales. Ten borrowers sold more than $6b this week, the second busiest week this month
Strong economic data, together with easing interest-rate policy, pulled borrowers into the market both for refinancing and funding acquisitions
Four more borrowers sold $3.5b on Thursday and two of the four funded leveraged buyouts
Month to date issuance is over $20b

(Bloomberg) Treasuries Plunge Like It’s 1995 as Traders See Soft Landing

The last time US government bonds sold off this much as the Federal Reserve started cutting interest rates, Alan Greenspan was orchestrating a rare soft landing.
Two-year yields have climbed 34 basis points since the Fed reduced rates on Sept. 18 for the first time since 2020. Yields rose similarly in 1995, when the Fed — led by Greenspan — managed to cool the economy without causing a recession. In prior rate cutting cycles going back to 1989, two-year yields on average fell 15 basis points one month after the Fed started slashing rates.
Rising yields “reflect the reduced probability of recession risks,” said Steven Zeng, an interest rate strategist at Deutsche Bank AG. “Data has come in pretty strong. The Fed may slow the pace of rate cuts.”
The latest backup in yields shows how a resilient US economy and buoyant financial markets limit the options for Fed Chair Jerome Powell to aggressively lower rates. Interest swaps show traders are expecting the Fed to lower rates by 128 basis points through September 2025, compared with 195 basis points priced in about a month ago.
Global bonds have been sliding this week as investors weigh the potential of slower rate reductions.
The selloff extended slightly on Tuesday, pushing the 10-year yield up about one basis point after an increase of 11 basis points on Monday. The recent rise has brought the yield on the benchmark to around 4.2%, up from a 15-month low of 3.6% on Sept. 17 — one day before the Fed lowered borrowing costs by half a point.
On Tuesday, trading activities suggested that sentiment remains bearish, with a series of sales of block trades in 10-year note futures. In the options market, one trade targets the 10-year yields rising to about 4.75% by the option expiry on Nov. 22.
In 1995, the Fed slashed interest rates just three times — from 6% to 5.25% — in six months, after lifting them sharply. Yields on 10-year notes jumped more than 100 basis points 12 months later after the first cut that year, while two-year yields rose 90 basis points.
Currently, volatility has also picked up. The ICE BofA Move Index, which tracks expected swings in Treasuries in the coming month, has climbed to the highest level this year.

25 Oct 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads moved wider this week after touching their snuggest levels of the year just 7 days ago. The Bloomberg US Corporate Bond Index closed at 84 on Thursday October 24 after closing the week prior at 81. The 10yr Treasury yield moved higher this week, cresting at a 3-month high on Wednesday. The 10yr moved from 4.08% last Friday to 4.21% through Thursday. Through Thursday, the corporate bond index year-to-date total return was +3.14%. The yield to maturity on the corporate index has inched back above 5% and closed Thursday at a YTM of 5.08%.

Economics

It was a benign week for economic data with little in the way of market moving prints. Existing home sales didn’t improve in September even as mortgage rates came down which was somewhat of a surprise but with no discernible market impact. S&P global PMI numbers were in line with expectations. Next week brings some more meaningful releases with GDP as well as personal income/spending and the all-important Core PCE. Looking ahead, the FOMC meets on November 7. Recall that there is no Fed meeting in the month of October.

Issuance

It was an underwhelming week for issuance, which is not something that we have been able to write very frequently throughout 2024. Companies priced just $12.1bln of high-grade bonds relative to the consensus estimate of $20bln. Treasury yields have moved higher over the past few weeks making issuance slightly less attractive for borrowers. We are also in the midst of corporate earnings meaning the window is closed for some companies. We expect another relatively quiet week ahead with the election fast approaching.

Flows

According to LSEG Lipper, for the week ended October 23, investment-grade bond funds reported a net inflow of +$1.88bln. This was the 13^th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$64.6bln.

23 Oct 2024

Insight, Investment Grade Quarterly CAM Team 0 comment

2024 COMENTARIO DEL TERCER TRIMESTRE

El crédito con grado de inversión registró un sólido desempeño durante el tercer trimestre, ya que los tenedores de bonos se beneficiaron de diferenciales de crédito más ajustados y rendimientos de los bonos del Tesoro más bajos. La Reserva Federal finalmente dio inicio al tan esperado ciclo de flexibilización al reducir su tasa de referencia por primera vez desde marzo de 2020. Seguimos siendo constructivos respecto del mercado de bonos con grado de inversión en el corto y mediano plazo.

El diferencial ajustado por opciones (OAS) en el Índice de bonos corporativos de EE. UU. de Bloomberg abrió el tercer trimestre en 94 y cotizó en un amplio 111 a principios de agosto antes de terminar el trimestre con un diferencial de 89. Agosto trajo consigo algunos días hábiles volátiles, algo que aún no habíamos experimentado en 2024. La debilidad de los datos sobre manufactura y empleo perjudicaron el ánimo de los inversores y los índices bursátiles se desplomaron, lo que repercutió en los diferenciales de crédito. La debilidad en los diferenciales duró poco. El índice IG cerró en 111 el 5 de agosto antes de retroceder gradualmente hasta los 100 puntos el 14 de agosto. A partir de ahí, los diferenciales continuaron reduciéndose hacia el final del trimestre.

Los rendimientos de los bonos del Tesoro bajaron significativamente durante el trimestre, lo que supuso un viento a favor para los rendimientos totales. Esto contrasta con el segundo trimestre, en el que las tasas aumentaron en general. El extremo inicial de la curva de rendimiento fue especialmente más bajo en el tercer trimestre, con el Tesoro a 2 años registrando un enorme movimiento intertrimestral a la baja de -111 puntos básicos. Consideramos este repunte en la parte inicial de la curva como una respuesta clásica al recorte de la Reserva Federal, ya que históricamente las tasas a corto plazo suelen verse mucho más afectadas que las tasas más alejadas de la curva.

La emisión corporativa con grados de inversión continuó a su ritmo vertiginoso. Tanto julio como septiembre establecieron récords históricos por el mayor volumen jamás llevado al mercado en cada uno de esos meses. Se emitieron 1,264 billones de dólares de nueva deuda con grado de inversión durante el tercer trimestre, lo que supone una ventaja del 29% con respecto al ritmo de 2023 – y 2023 no se quedó atrás. Como hemos escrito en notas anteriores, el mercado de nuevas emisiones de 2024 ha estado en una zona privilegiada. Los prestatarios con calificación IG se han sentido cómodos con las tasas que están pagando, y los inversores han estado satisfechos con la compensación brindada. Los flujos de fondos han sido muy positivos y han apoyado la demanda de los inversores, y las concesiones por nuevas emisiones han sido razonables para la mayoría de las operaciones. La economía ha estado en una situación sólida y las empresas han necesitado capital para hacer crecer sus negocios. Queda por ver si este entorno persistirá o si tal vez se adelantó algún endeudamiento antes de las elecciones presidenciales de noviembre. En resumen, el mercado de nuevas emisiones ha estado increíblemente activo y ha funcionado a un alto nivel durante los primeros tres trimestres de 2024.

Los indicadores crediticios con grado de inversión continuaron mostrando resiliencia al final del segundo trimestre, beneficiándose de una economía que ha seguido creciendo. Los márgenes de EBITDA fueron del 30.3% al final del segundo trimestre, un nuevo máximo histórico, mientras que el crecimiento del EBITDA estuvo en su nivel más alto en dos años. La cobertura de intereses también mejoró gradualmente durante el trimestre, pero esto fue contrarrestado por un apalancamiento ligeramente mayor en todo el universo IG. En resumen, creemos que el crédito IG ofrece muchas oportunidades para invertir en empresas adecuadamente capitalizadas con buenos negocios y diferenciales atractivos.

Un año puede marcar una gran diferencia

La Reserva Federal aplicó un recorte de 50 puntos básicos en su reunión de septiembre. Esto ocurrió después de haber elegido mantener constante su tasa de referencia en la reunión de julio y no haber habido reunión en agosto. El “gráfico de puntos” de la Reserva Federal que se publicó coincidiendo con la reunión mostró que la mediana de los puntos de vista de los 19 miembros del Comité Federal del Mercado Abierto (FOMC) eran las siguientes: 50 puntos básicos de recortes adicionales en 2024, 100 puntos básicos de recortes en 2025 y otros 50 puntos básicos de recortes en 2026. Los participantes del mercado adoptaron un punto de vista más moderado que la proyección de la Reserva Federal para el resto de 2024, y los futuros de los fondos de la Reserva Federal desestimaron recortes de 71 puntos básicos antes de fin de año al 1 de octubre. Creemos que este ciclo de flexibilización será deliberado y se desarrollará a lo largo de varios años. La Reserva Federal no puede darse el lujo de actuar demasiado apresuradamente debido al riesgo de reavivar las presiones inflacionarias. El comodín es que la Reserva Federal podría recortar su tasa más rápida y agresivamente si el mercado laboral se deteriora rápidamente respecto de los niveles actuales, ya que históricamente ese ha sido un indicador adelantado de recesión.

Pensamos que sería instructivo ilustrar la progresión de los rendimientos de grado de inversión a lo largo del ciclo de ajuste que desde entonces se ha convertido en un ciclo de flexibilización. El gráfico de la página siguiente muestra el rendimiento total del índice IG desde su inicio, pero hemos recortado los datos para mostrar el ciclo actual desde principios de 2022 hasta el tercer trimestre de 2024. El mercado alcanzó su mínimo del ciclo actual en octubre de 2022 antes de recuperarse en 2023, operando de forma lateral antes de volver a caer en octubre de 2023. Hubo un poderoso aumento durante el cuarto trimestre de 2023 antes de que el mercado se mantuviera estancado durante la mayor parte de este año hasta el último trimestre, donde una vez más ha tendido en una dirección positiva.

Las líneas verticales del gráfico representan reuniones cruciales de la Reserva Federal que han tenido lugar desde principios de 2022, las cuales exploraremos más adelante. A modo de aclaración, seríamos negligentes si no dijéramos que este análisis es mucho más fácil con el beneficio de la retrospectiva, pero creemos que, no obstante, es un ejercicio interesante.

3/16/2022: El primer aumento de la tasa de referencia del ciclo de ajuste. Esto fue bien anunciado y anticipado por los inversores y muchos pensaron que la Reserva Federal debería haber actuado incluso antes para combatir la inflación.

7/26/2023: El último aumento de la tasa del ciclo de ajuste. Esto llevó la tasa de referencia a su nivel más alto en 22 años. Recordemos que, en ese momento, no estaba del todo claro si la Reserva Federal había concluido con los aumentos. Después de todo, la Reserva Federal ya hizo una pausa en junio para luego volver a aumentar las tasas en esta reunión. En la conferencia de prensa posterior a la decisión del FOMC, el presidente Powell dijo: “Ciertamente es posible que volvamos a aumentar las tasas en la reunión de septiembre”. “Y yo también diría que es posible que optemos por mantenernos firmes en esa reunión”.

9/20/2023: La Reserva Federal vuelve a hacer una pausa por primera vez desde junio, pero no se compromete a realizar más alzas.

11/1/2023: La Reserva Federal hace una tercera pausa en el ciclo y los comentarios de Powell indican que la vara está más alta para un mayor ajuste a través de ajustes a la tasa de referencia. ¿Es coincidencia que el mercado haya subido mucho a finales de año?

7/31/2024: La Reserva Federal mantiene estables las tasas, pero indica que se vislumbran recortes a corto plazo.

9/18/2024: La Reserva Federal aplica su primer recorte de tasas del ciclo actual. Al final del tercer trimestre, el índice IG había recuperado casi la totalidad del valor que perdió durante el ciclo de ajuste. El índice ha registrado un rendimiento total del +14.28% desde el final del tercer trimestre de 2023 hasta el final del tercer trimestre de 2024.

¿Qué ha cambiado en nuestra cartera?

El mayor cambio que hemos podido implementar en 2024 es que las ventas y ampliaciones han vuelto a ser económicas. Gran parte de lo que intentamos lograr para nuestros clientes se deriva de nuestro posicionamiento intermedio. Generalmente poblamos las cuentas nuevas con bonos que vencen en 8 a 10 años. Luego permitiremos que esos bonos desciendan por la curva de rendimiento, con el objetivo de comprimir los diferenciales a medida que los bonos se acerquen a la marca de los 5 años. Cuando falten unos 5 años para el vencimiento, empezaremos a vender bonos y a ampliar la curva. Esto nos permite mitigar el riesgo de tasa de interés y captar la inclinación de la curva de 5/10 del Tesoro, así como la curva de crédito corporativo. ¡Todo esto es cierto en tiempos normalizados, pero los últimos dos años han sido todo lo contrario! La curva de bonos 2/10 del Tesoro se invirtió durante un récord de 25 meses consecutivos (consulte el gráfico a continuación de la Reserva Federal de St. Louis).[i] Esto hizo que nuestras operaciones de venta y extensión fueran antieconómicas: las matemáticas simplemente dictaban que a nuestros clientes, en muchos casos, les convenía mantener sus bonos existentes durante más tiempo del habitual, para permitir que pasara el ciclo de ajuste y ganar tiempo para que la curva recuperara su inclinación. Durante este tiempo, seguíamos ocupados investigando y supervisando los créditos y realizando cambios en los márgenes, pero nuestra actividad de venta de cuentas totalmente invertidas durante el punto máximo de la inversión de la curva se vio gravemente disminuida. Esto cambió de manera importante en 2024, ya que las curvas comenzaron a normalizarse y estamos encontrando oportunidades comerciales mucho más atractivas que hemos utilizado para agregar valor para nuestros clientes. Nuestro volumen se duplicó durante el último año y ahora se acerca a una cifra mucho más acorde con los promedios históricos.

¿El crédito IG es caro o barato?

En lo que se refiere a la valoración, los diferenciales de crédito de IG se encuentran en el extremo ajustado de los rangos históricos. Creemos que los diferenciales están bastante valorados dada la solidez de las métricas crediticias en todo el universo IG y la resiliencia de la economía estadounidense. Los diferenciales de crédito incorporan en los precios muy pocas probabilidades de una recesión, pero creemos que los inversores cuentan con cierta protección frente a una desaceleración económica debido a que los rendimientos de los bonos del Tesoro aún son elevados en relación con los promedios de mediano plazo. El rendimiento al vencimiento del índice de grado de inversión al final del tercer trimestre fue del 4.73%, mientras que el promedio de 10 años fue del 3.62%. El gráfico de la derecha muestra una imagen aproximada de lo que una nueva cuenta en el programa de Grado de Inversión de Cincinnati Asset Management, Inc. (CAM) podría esperar al final del trimestre.

Entrando en la recta final

A medida que entramos en los últimos meses del año, no podemos evitar la sensación de que los participantes del mercado están casi demasiado cómodos. La probabilidad media de una recesión durante el próximo año calendario, según una encuesta de economistas de Bloomberg, ha caído al 30% frente al 55% de hace un año. Se han logrado grandes avances en materia de inflación, pero aún queda trabajo por hacer y hay riesgos a la baja si la Reserva Federal es demasiado agresiva al flexibilizar su tasa de referencia. Existen numerosos problemas geopolíticos y graves conflictos en curso en todo el mundo. Las elecciones presidenciales en Estados Unidos se celebrarán en menos de un mes. A pesar de estos riesgos, los índices bursátiles nacionales se encuentran en máximos históricos y los diferenciales de crédito se mantienen ajustados. Si bien es cierto que la probabilidad de un impacto controlado ha aumentado, todavía hay motivos para ser cautelosos.

Seguimos siendo meticulosos a la hora de completar nuestras carteras de inversores. Estamos en la búsqueda de empresas duraderas con un fuerte flujo de caja libre y métricas crediticias que sean lo suficientemente sólidas como para resistir una recesión. Contáctenos si tiene alguna pregunta o desea hablar sobre algún tema. Agradecemos su interés y colaboración.

Esta información solo tiene el propósito de dar a conocer las estrategias de inversión identificadas por Cincinnati Asset Management. Las opiniones y estimaciones ofrecidas están basadas en nuestro criterio y están sujetas a cambios sin previo aviso, al igual que las declaraciones sobre las tendencias del mercado financiero, que dependen de las condiciones actuales del mercado. Este material no tiene como objetivo ser una oferta ni una solicitud para comprar, mantener ni vender instrumentos financieros. Los valores de renta fija pueden ser vulnerables a las tasas de interés vigentes. Cuando las tasas aumentan, el valor suele disminuir. El rendimiento pasado no es garantía de resultados futuros. El rendimiento bruto de la tarifa de asesoramiento no refleja la deducción de las tarifas de asesoramiento de inversión. Nuestras tarifas de asesoramiento se comunican en el Formulario ADV Parte 2A. En general, las cuentas administradas mediante programas de firmas de corretaje incluyen tarifas adicionales. Los rendimientos se calculan mensualmente en dólares estadounidenses e incluyen la reinversión de dividendos e intereses. El índice no está administrado y no considera las tarifas de la cuenta, los gastos y los costos de transacción. Se muestra con fines comparativos y se basa en información generalmente disponible al público tomada de fuentes que se consideran confiables. No se hace ninguna afirmación sobre su precisión o integridad.

La información suministrada en este informe no debe considerarse una recomendación para comprar o vender ningún valor en particular. No hay garantía de que los valores que se tratan en este documento permanecerán en la cartera de una cuenta en el momento en que reciba este informe o que los valores vendidos no se hayan vuelto a comprar. Los valores de los que se habla no representan la cartera completa de una cuenta y, en conjunto, pueden representar solo un pequeño porcentaje de las tenencias de cartera de una cuenta. No debe suponerse que las transacciones de valores o participaciones analizadas fueron o demostrarán ser rentables, o que las decisiones de inversión que tomemos en el futuro serán rentables o igualarán el rendimiento de la inversión de los valores discutidos en este documento. Como parte de la educación de los clientes sobre la estrategia de CAM, podemos proporcionar información de vez en cuando que incluya referencias a tasas y diferenciales históricos. Los ejemplos hipotéticos que hacen referencia al nivel o cambios en las tasas y diferenciales tienen únicamente fines ilustrativos y educativos. No pretenden representar el desempeño de ninguna cartera o valor en particular, ni incluyen el impacto de las tarifas y gastos. Tampoco toman en consideración todas las condiciones económicas y de mercado que habrían influido en nuestra toma de decisiones. Por lo tanto, las cuentas de los clientes pueden experimentar o no escenarios similares a los mencionados en este documento.

En nuestro sitio web se encuentran disponibles las divulgaciones adicionales sobre los riesgos materiales y los posibles beneficios de invertir en bonos corporativos: https://www.cambonds.com/disclosure-statements/

i Bloomberg, 1 de octubre de 2024 “IG PIPELINE: Comienzo tranquilo del cuarto trimestre tras un septiembre récord”

ii Investigación de Barclays FICC, 9 de septiembre de 2024 “Métricas de crédito con grado de inversión de EE. UU., actualización del segundo trimestre de 2024: mantenimiento a flote”

iii Junta de la Reserva Federal, 19 de septiembre de 2024 “Resumen de proyecciones económicas”

iv Bloomberg, 1 de octubre de 2024 “Probabilidad de la tasa de interés mundial”

v AP News, 26 de julio de 2023 “La Reserva Federal aumenta las tasas por undécima vez para combatir la inflación, pero no da señales claras de su próximo movimiento”

vi Thomson Reuters, 5 de agosto de 2024 “La curva de rendimiento de los bonos clave de EE. UU. se vuelve positiva por temores de recesión”

vii Bloomberg, 3 de octubre de 2024, “Pronóstico de probabilidad de recesión en Estados Unidos”

18 Oct 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads moved tighter again this week and are now trading at the narrowest levels that they have seen in years. The Bloomberg US Corporate Bond Index closed at 79 on Thursday October 17 after closing the week prior at 81. The 10yr Treasury yield was less than a full basis point lower week over week through Thursday, trading at 4.09% into the close. Through Thursday, the corporate bond index year-to-date total return was +4.10%.

Spreads are Tight, and for Good Reason

It has become a common refrain among some investors who are quick to shout from the rooftops about how tight credit spreads are, especially as spreads have been grinding lower for the past month. The index is 22bps tighter since September 11 and the spread on the Corporate Index is at its lowest level since 2005. First, we would remind investors that tight spreads are not limited to investment grade and that they are tight across the entire fixed income universe. And why shouldn’t spreads be tight? Stocks are at or near all-time highs. The economy continues to hum along and a “soft landing” or “no landing” has become increasingly likely. Most especially, if the economy takes a turn for the worse, the vast majority of investment grade rated companies are in little danger of delivering any type of permanent impairment to their bondholders. This is not true in other sectors of the bond market like leveraged loans, junk bonds or private credit, all of which carry appreciably more credit risk for investors than the investment grade market.

Aside from a strong fundamental backdrop, there are also numerous technical factors that have been supportive of spreads.

The permanence of the foreign bid. Foreign investors are among the largest holders of US corporate bonds and while they haven’t been huge buyers in 2024, they also haven’t been sellers and have still been adding to positions at the margin.
Fund flows into the IG asset class have been roundly positive by all measurable sources. One source of fund flows that we track has shown positive inflows into IG funds in 36 of 42 weeks thus far in 2024.
Life and P&C insurance companies have been strong buyers of IG credit on the entire curve throughout 2024. Have you looked at your insurance bill lately? Premiums are up sharply in recent years and insurance companies invest the majority of these funds into investment grade fixed income in order to pay future claims.
Pensions need to be rebalanced and many are fully funded. With equity markets having posted strong returns in recent years pensions must divert more funds to their fixed income allocations in order to balance their overall portfolios. Also, there are many more pensions that are fully funded today relative to where they have been in the recent past –this leads the pension manager to take less risk, favoring asset classes like IG credit.
Lack of new issue supply in the final 10 weeks of the year could drive secondary spreads even tighter. It is well understood how strong corporate IG issuance has been thus far in 2024 but one of the reasons for this is the aforementioned demand factors. It seems unlikely that issuance can sustain its torrid pace through year end and if in fact it does slow then this could be another technical that could drive spreads tighter.

Finally, the main reason that spreads are as tight is a rather simplistic one: it’s all about yield. Many investors in the IG market are agnostic to the overall level of spreads and care much more about yield. These investors use IG credit to solve a problem. For example, they may have a liability coming due in 10yrs and they need a 5% annual return in a high-quality investment –there are many IG bonds that would satisfy that requirement. Credit spread is simply a component of your overall yield when you invest in a corporate bond. We have highlighted this throughout the year: the yield to maturity for the IG corporate bond index was 4.94% on Thursday afternoon. The average YTM for the index the past 10yrs was 3.63%. If you go back 20yrs that number was 4.16%. Each investor has their own suitability requirements but we think IG credit at ~5% is undeniably attractive, especially considering how infrequently this type of compensation has been available in recent years.

Issuance

It was a solid week for issuance during the holiday shortened week as companies priced $25.8bln of new debt. However, this fell short of the top end of estimates that were looking for as much as $30bln. Financial firms accounted for 100% of issuance this week which was widely expected by investors with banks hungry to issue debt on the back of earnings. Many of the banks printed strong quarterly earnings reports which led to enthusiastic investor demand for their new debt. We continue to expect issuance to slow over the next 17 days as the election draws nearer but syndicate desks are still looking for a respectable $20bln of issuance in the week to follow.

Flows

According to LSEG Lipper, for the week ended October 16, investment-grade bond funds reported a net inflow of +$2.17bln. This was the 12^th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$62.7bln.

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