Insight – Cincinnati Asset Management

15 Jul 2024

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

2024 Q2 High Yield Quarterly

In the second quarter of 2024, the Bloomberg US Corporate High Yield Index (“Index”) return was 1.09% bringing the year to date (“YTD”) return to 2.58%. The S&P 500 index return was 4.28% (including dividends reinvested) bringing the YTD return to 15.29%. Over the period while the 10-year Treasury yield increased 20 basis points the Index option adjusted spread (“OAS”) widened 10 basis points moving from 299 basis points to 309 basis points.

With regard to ratings segments of the High Yield Market, BB rated securities tightened 7 basis points, B rated securities widened 13 basis points, and CCC rated securities widened 91 basis points. The chart below from Bloomberg displays the spread moves in the Index over the past five years. For reference, the average level over that time period was 405 basis points.

The sector and industry returns in this paragraph are all Index return numbers. The Index is mapped in a manner where the “sector” is broader with the more specific “industry” beneath it. For example, Energy is a “sector” and the “industries” within the Energy sector include independent energy, integrated energy, midstream, oil field services, and refining. The Consumer, Non-Cyclical, Other Financial, and Brokerage sectors were the best performers during the quarter, posting returns of 2.54%, 2.42%, and 2.35% respectively. On the other hand, Communications, REITs, and Transportation were the worst performing sectors, posting returns of -1.76%, 0.52%, and 0.55% respectively. At the industry level, pharma, other industrial, and leisure all posted the best returns. The pharma industry posted the highest return of 9.49%. The lowest performing industries during the quarter were wirelines, media, and cable. The wirelines industry posted the lowest return of -3.01%.

The year continued with strong issuance during Q2 after the very strong start that took place in Q1. The $82.1 billion figure is the most volume in a quarter since the fourth quarter of 2021, not counting Q1 this year. Of the issuance that did take place during Q2, Discretionary took 22% of the market share followed by Financials at 20% share and Energy at 16% share.

The Federal Reserve did hold the Target Rate steady at the May and June meetings. There was no meeting held in April. This made seven consecutive meetings without a hike. The last hike was back in July of 2023. The Fed dot plot shows that Fed officials are forecasting 25 basis points in cuts during 2024 down from a 75 basis cut forecast at the beginning of this year. Market participants have continued to reign in their own expectations of cuts during 2024 based on the pricing of Fed Funds Futures. At the start of the year participants expected over 150 basis points in cuts during 2024; however the expectation is now down to approximately 45 basis points in cuts this year. After the June meeting, Chair Powell commented “the most recent inflation readings have been more favorable than earlier in the year.” He continued “there has been modest further progress toward our inflation objective. We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.” The Fed’s main objective has been lowering inflation and it continues to generally trend in the desired direction. The most recent report for Core CPI showed a year over year growth rate of 3.4% down from a peak of 6.6% almost two years ago. Further, the most recent Core PCE growth rate measured 2.6% off the peak of 5.6% from February of 2022.

Intermediate Treasuries increased 20 basis points over the quarter as the 10-year Treasury yield was at 4.20% on March 31st and 4.40% at the end of the second quarter. The 5-year Treasury increased 17 basis points over the quarter moving from 4.21% on March 31st to 4.38% at the end of the second quarter. Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the target rate. The revised first quarter GDP print was 1.4% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2024 around 2.3% with inflation expectations around 2.8%.

Being a more conservative asset manager, Cincinnati Asset Management does not buy CCC and lower rated securities. Additionally, our interest rate agnostic philosophy keeps us generally positioned in the five to ten year maturity timeframe. During Q2, our higher quality positioning served clients well as lower rated securities underperformed but maturity positioning was a detractor as the less than three year timeframe bucket outperformed. Additionally, there was a performance drag due to our credit selections within the consumer non-cyclical and energy sectors. Benefiting our performance this quarter were our credit selections in the communications sector and our underweight in the communications sector.

The Bloomberg US Corporate High Yield Index ended the second quarter with a yield of 7.91%. Treasury volatility as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index) has picked up quite a bit the past couple of years. The MOVE averaged 121 during 2023 relative to a 62 average over 2021. However, the current rate of 98 is well below the spike near 200 back during the March 2023 banking scare. Data available through May shows 11 defaults during 2024 which is relative to 16 defaults in all of 2022 and 41 defaults in all of 2023. The trailing twelve month dollar-weighted default rate is 2.52%. The current default rate is relative to the 1.74%, 1.93%, 2.37%, 2.53% default rates from the previous four quarter end data points listed oldest to most recent. While defaults are ticking up, the fundamentals of high yield companies still look good. From a technical view, fund flows were positive in the quarter at $3.3 billion. No doubt there are risks but we are of the belief that for clients that have an investment horizon over a complete market cycle, high yield deserves to be considered as part of the portfolio allocation.

The high yield market continues to hum along with positive performance and attractive yields. Corporate fundamentals are broadly in good shape, defaults held steady this quarter and issuance remains robust. While GDP still looks good there are some items to note that are relevant to the consumer namely rising delinquencies, depleted excess savings from the pandemic, and an unemployment rate that is on the rise. These items are likely to weigh on the data dependent Fed to commence rate cuts. Among others, the ECB and Bank of Canada have already enacted rate cuts. Looking ahead, the second half of the year contains some events of interest including the presidential election and the probable start of a US rate reduction cycle. Our exercise of discipline and credit selectivity is important as we continue to evaluate that the given compensation for the perceived level of risk remains appropriate. As always, we will continue our search for value and adjust positions as we uncover compelling situations. Finally, we are very grateful for the trust placed in our team to manage your capital.

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. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

Additional disclosures on the material risks and potential benefits of investing in corporate bonds are available on our website: https://www.cambonds.com/disclosure-statements/

i Bloomberg, June 28 2024 “High-Grade Bond Sales on Easter Pause After Record First Quarter”

ii Bloomberg WIRP, March 29 2024 “Fed Funds Futures”

iii Bloomberg WIRP, June 29 2024 “Fed Funds Futures”

iv Raymond James & Associates, June 28 2024 “Fixed Income Spreads”

v Barclays Bank PLC, June 13 2024 “US Investment Grade Credit Metrics, Q2 2024 Update: No Concerns”

vi J.P. Morgan, July 3 2024 “US High Grade Corporate Bond Issuance Review”

vii Bloomberg ILM3NAVG Index, June 28 2024 “Bankrate.com US Home Mortgage 30 Year Fixed National Avg”

viii CNBC, June 13 2024 “The Federal Reserve’s period of rate hikes may be over. Here’s why consumers are still reeling”

15 Jul 2024

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

2024 Q2 Investment Grade Quarterly

Spanish version coming soon

The second quarter of the year was similar to the first. Credit spreads remained in a tight range and stubbornly higher Treasury yields continued to be a thorn in the side of total returns. Investors have begun to accept that the bar for an easing cycle is high though the data has been more cooperative lately in helping the Fed to reach that goal. We continue to believe that the current environment is opportunistic for bond investors but it may require patience. IG credit will likely be a carry trade until the Fed starts to move the policy rate lower. Elevated yields and higher coupons could be a boon for investors that use bonds as a mechanism to preserve capital.

Second Quarter Review

The option adjusted spread (OAS) on the Bloomberg US Corporate Bond Index opened the second quarter at 90 and traded as tight as 85 in early June before finishing the quarter at a spread of 94. Recall that the index began 2024 at a spread of 99 and briefly traded as wide as 105 in early January before it started its march tighter. Spreads traded in a narrow band during the second quarter where the corporate OAS for the index was rangebound to the tune of only 10 basis points during the period.

Treasury yields continued to grind higher in the second quarter which has been the principal reason that year-to-date total returns for the IG index were modestly negative. Yields were higher during the first quarter and that theme continued during the second quarter.

The below chart is illustrative of where Treasury yields were prior to and during the coronavirus pandemic –meaningfully lower back then relative to the present.

Corporate issuance remained strong during the second quarter but could not keep up with the record-breaking pace of the first quarter. Year-to-date new issue volume was $867 billion at the end of the second quarter. There are several reasons behind the robust environment for issuance and companies’ eagerness to issue debt. On the demand side inflows for the investment grade asset class have been strong with over $200bln into taxable bond funds through the end of May (June flow data was not yet available at the time of publication). Additionally, insurance companies have been strong buyers of bonds on the back of premium rate increases and pension funds have been allocating to a variety of fixed income asset classes as they look to rebalance their portfolios to account for strong equity performance in 2023 and the first half of 2024. Foreign buyers have also been participating in the US corporate market as the ECB and some other central banks in Europe and elsewhere have started to ease by cutting their policy rates which has made dollar-denominated bonds more attractive than the bonds of some other currencies. From the standpoint of borrowers although the all-in yields that they are paying are elevated compared to the recent past spreads are snug. Most investment grade balance sheets are healthy enough to borrow at current rates and the cost of debt is reasonable and within capital allocation frameworks for many stronger companies. Another factor driving issuance is future uncertainty: many management teams would rather borrow funds now in a relatively low volatility environment. A US presidential election, a potential Fed easing cycle, and an economy that could start to show the strain of higher rates could make it more difficult or expensive to access capital in the second half of the year.

Investment grade credit metrics remained on solid footing at the end of the first quarter. EBITDA margins were very close to all-time highs and EBITDA growth was still positive albeit at a slower pace than the previous quarter. It wasn’t all rosy though as cash balances fell slightly and net leverage increased which had a negative impact on interest coverage. We feel quite good about the health of IG corporate credit broadly speaking but as an active manager we seek to invest in companies with stable or improving credit metrics and eschew those that are struggling to perform.

Fed Update – Still on Hold

Investor views have evolved and they are now in a much more realistic place with regard to a potential easing cycle relative to where they started the year. Recall that back then interest rate futures markets were implying as many as seven 25bp rate cuts. The Fed’s own projections have been more pragmatic than investors. The Fed dot plot median consensus showed expectations for 3 rate cuts at its December 2023 update and then again at its March 2024 update. The Fed tempered its expectations in June 2024 with a further adjustment to the dots that showed a close call between one or two cuts in the second half of 2024. Out of the 19 FOMC members, eight expected two cuts, seven projected one, and four believe that there will be none at all. Investors have acquiesced and interest rate futures at the end of the second quarter showed a 56% probability of a cut in July and a 75% probability of a cut in December. The Fed would love to join the list of central banks that have cut rates that includes the ECB, Canada, Czech Republic, Hungary, Sweden, and Switzerland but this is a FOMC that understands and appreciates the mistakes of the past. We continue to expect one or two cuts in 2024 although we would note that there are only four opportunities left for this to happen because the FOMC does not meet in August or October. We continue to believe that the longer the Fed waits to cut the more likely it will result in an economic slowdown and we are managing the portfolio with this in mind.

Coupon vs. Total Return

With the Fed in a holding pattern what does it mean for investment grade credit? We believe that it has created an environment where the bulk of investor returns in the near term will come in the form of coupon while they are paid to wait for the likely start of an easing cycle and yield curve normalization. The average coupon on the index at the end of the second quarter was 4.2% up from 3.9% and 3.6% at the end of June 2023 and June 2022 respectively. But this does not tell the whole story as the coupon for intermediate maturity debt that is being issued today is virtually guaranteed to have a higher coupon than the average which is artificially low due to the amount of debt that issued during the era of ultra-low interest rates. A better way to look at the coupon available to investors in the market today is to use the average yield to maturity (YTM%) for the index as a proxy for coupon. Average YTM% finished the second quarter at 5.48% which is a good approximation of what it would cost an average investment grade rated company to issue debt today.

We have beaten the drum on this point for the past few quarters: as the above chart illustrates there have been limited opportunities during the past decade for investors to deploy capital at these yields and coupons. In a simplified example if an investor has a bond portfolio with an average coupon of 5% and the prices of the bonds in that portfolio do not change at all during the year then that investor earns a one-year total return of 5% in the form of coupon income. A coupon above 5% for IG credit is very attractive in our view and provides the investor with a good chance to generate positive total returns over time as well as a higher degree of downside protection that was unavailable a few years ago when interest rates were much lower.

Spreads vs. Yields

Although yields are near the high end of their historical range spreads are near the tight end. The following two charts show the level of spreads for the index as well as the percentage of the portion of the index yield that is represented by credit spread. For example if an investor buys an investment grade corporate bond at a spread of 100 basis points over the 10yr Treasury at 4.40% then the yield for that corporate bond is 5.40% and 18.5% of that yield is from credit spread. Tight spreads and elevated Treasury yields have created an environment where a relatively small portion of an investor’s overall compensation is derived from spread today.

Credit spread is the compensation an investor receives in exchange for taking the credit risk of owning a corporate bond versus taking no credit risk at all for owning the underlying Treasury (the risk-free rate). There are a few reasons that spreads are tight today. First and foremost financial conditions for investment grade rated borrowers are good and we discussed some of those metrics earlier in this note. Secondly, the default rate for investment grade rated companies has historically been exceedingly low so it is typical for spreads to be tight when the economy is growing and corporate balance sheets are healthy. Finally an environment of elevated Treasury yields can lend itself to tight credit spreads. This is because there is a large base of buyers in the investment grade market that care more about all-in yields than they do about spreads. These investors may have a yield bogey or a hurdle rate that they need to clear for an investment making them agnostic about spreads but more sensitive to yields. As professional bond managers spreads are very important to us because we use them to assess the relative value of individual bonds when we evaluate them for purchase or for sale. Whether you care about spread yield or both; the bottom line is that investors are currently being well compensated for owning IG credit in the form of coupon and yield even if spreads are tight.

Second Half Outlook

The second half of the year could be volatile with several big events on the horizon. For the first time in a while we are starting to see pockets of legitimate economic uncertainty. On one hand the economy has been resilient. But questions remain about the ability for economic perseverance in the face of an extended financial tightening cycle that began in March of 2022. The consumer drives the US economy and they have kept spending but how long can they continue to do so now that excess savings have been exhausted and with a current savings rate that has been steadily negative? Labor market data has weakened slightly in recent months but the unemployment rate is still near the low end of its historical range. We are not one to cry wolf and we do not think we are on the brink of economic malaise but we see a lot less room for error today for the economy than at any point since before 2020. Many consumers are stretched with little cushion and a pullback in wages and/or employment could tip the economy into a recession.
Given this backdrop we are populating investor portfolios accordingly and are seeking to avoid companies and industries that are discretionary in nature. We are still taking appropriate risks but only if the compensation is commensurate. Thank you for our continued interest. We look forward to collaborating with you as we navigate the credit markets together. As always please reach out with any questions or topics for discussion.

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. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees expenses and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. As part of educating clients about CAM’s strategy we may include references to historical rates and spreads. Hypothetical examples referencing the level of, or changes to, rates and spreads are for illustrative and educational purposes only. They are not intended to represent the performance of any particular portfolio or security, nor do they include the impact of fees and expenses. They also do not take into consideration all market and economic conditions that influence our decision-making. Therefore, client accounts may or may not experience scenarios similar to those referenced herein.

Additional disclosures on the material risks and potential benefits of investing in corporate bonds are available on our website: https://www.cambonds.com/disclosure-statements/

i Bloomberg, June 28 2024 “High-Grade Bond Sales on Easter Pause After Record First Quarter”

ii Bloomberg WIRP, March 29 2024 “Fed Funds Futures”

iii Bloomberg WIRP, June 29 2024 “Fed Funds Futures”

iv Raymond James & Associates, June 28 2024 “Fixed Income Spreads”

v Barclays Bank PLC, June 13 2024 “US Investment Grade Credit Metrics, Q2 2024 Update: No Concerns”

vi J.P. Morgan, July 3 2024 “US High Grade Corporate Bond Issuance Review”

vii Bloomberg ILM3NAVG Index, June 28 2024 “Bankrate.com US Home Mortgage 30 Year Fixed National Avg”

viii CNBC, June 13 2024 “The Federal Reserve’s period of rate hikes may be over. Here’s why consumers are still reeling”

28 Jun 2024

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

CAM Investment Grade Weekly Insights

Credit spreads were little changed during the week. The Bloomberg US Corporate Bond Index closed at 94 on Thursday June 27 after closing the week prior at the same level. The 10yr Treasury yield is slightly higher on the week, trading at 4.33% this Friday afternoon after closing last week at 4.26%. Through Thursday, the corporate bond index YTD total return was -0.02% while the yield-to-maturity for the benchmark was 5.43%.

Economics

Economic data this week was mostly in line with consensus and there were no major surprises. Highlights included a consumer confidence reading that was slightly below expectations and personal income data that came in slightly above expectations. The biggest release this week was Friday morning’s PCE price index which was about as consistent with expectations as it possibly could be. The release showed that the disinflationary environment sustained some momentum during May but it was probably not enough to make the Fed turn dovish. Continued progress will be needed if the Fed expects to follow through with two cuts in the latter half of the year. Next week is another disjointed one with several important releases early in the week (PMI, ISM manufacturing/services and durable goods) followed by a market holiday on Thursday in observance of Independence Day. The biggest release of the week occurs on Friday morning with the employment report for the month of June. Looking ahead, the Fed does not meet again until the very end of July.

Issuance

The IG primary market was strong this week as borrowers priced nearly $32bln in new debt, well ahead of the $20bln estimate. More than half of this week’s volume was from borrowers outside the U.S., with Asia Pacific firms and governments leading the way. So, although issuance was robust, it wasn’t coming from borrowers that are necessarily household names. Next week syndicate desks are looking for a quiet week with just $5bln of issuance and only $80bln of issuance for the seasonally slow month of July (that estimate would make it the lowest volume month so far in 2024). According to sources compiled by Bloomberg, after a record first quarter, the pace of issuance in 2024 slowed during the second quarter making 2024 the second busiest first half to a year on record. It was eclipsed only by the surge in borrowing that occurred during the trading days that followed the official onset of the 2020 pandemic.

Flows

According to LSEG Lipper, for the week ended June 26, investment-grade bond funds reported a net inflow of +$0.389bln. Short and intermediate investment-grade bond funds have seen positive flows 23 of the past 26 weeks. YTD flows into IG stand at +$37.2bln.

28 Jun 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 poised for a second-straight monthly gains, returning 0.9% so far as investors have shrugged off a hawkish Federal Reserve that’s signaled just one quarter-point cut in 2024.
Yields have dropped eight basis points to 7.92%, while spreads widened just five basis points to 313bps as 5- and 10-year Treasury yields through Thursday had both fallen 21 basis points
As we’ve written this week, uncertainty about the Fed’s rate outlook continued to take its toll in June on CCCs, the riskiest segment of the junk bond market
Yields have jumped six straight sessions, the longest since January, and have surged 50bps in June to 12.87%, on track for their first three-month uptrend since October 2022
Spreads have climbed 68bps this month to 814bps, set for the most since last October and this week hitting their widest since early February
Still, CCCs have returned 50% so far in June
Ba rated securities have returned 98% so far in June
B rated securities have returned 90% so far in June
Fed-fueled uncertainty has started keeping some high-yield borrowers on the sideline, with the primary market in June the slowest this year with almost $18b of issuance
In the wake of the big start to the year, Barclays boosted its 2024 forecast to $280-300b from $200-230b

(Bloomberg) Fed’s Favored Price Gauge Slows, Supporting Case for Rate Cut

The Federal Reserve’s preferred measure of underlying US inflation decelerated in May, bolstering the case for lower interest rates later this year.
The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.1% from the prior month. That marked the smallest advance in six months. On an unrounded basis, it was up just 0.08%, the least since November 2020.
From a year ago, it rose 2.6%, the least since early 2021, according to Bureau of Economic Analysis data out Friday. Inflation-adjusted consumer spending posted a solid advance after a pullback in April, driven by goods and fueled in part by a jump in incomes.
The report offers welcome news for Fed officials seeking to commence with rate cuts in the coming months, though policymakers will likely want to see additional reports like this one first. They recently dialed back their projections for rate cuts this year following worse-than-expected inflation data in the first quarter.
“The deflation in goods prices and weakness we are starting to see at least gets us a path to a possible September cut,” said KPMG Chief Economist Diane Swonk.
Central bankers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric increased 0.1% in May from the prior month, according to the BEA, the least since October.
Household demand has so far remained resilient even as borrowing costs have taken a toll on some sectors of the economy. The report showed inflation-adjusted outlays for services rose 0.1%, driven by airfares and health care. Spending on merchandise advanced 0.6%, led by computer software and vehicles.

21 Jun 2024

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

CAM Investment Grade Weekly Insights

Credit spreads moved incrementally wider for the second consecutive week. The Bloomberg US Corporate Bond Index closed at 94 on Thursday, June 20, after closing the week prior at 92. It isn’t shocking to see spreads take a breather as they have been at tight levels relative to historical trading ranges, and they have widened in concert with Treasury yields, which have decreased in recent weeks. The 10-year Treasury yield is nearly unchanged on the week, trading at 4.23% this Friday morning after closing last week at 4.22%. Through Thursday, the corporate bond index YTD total return was +0.16% while the yield-to-maturity for the benchmark was 5.39%. All-in yields remain elevated relative to the recent past – the average yield on the corporate index over the past 10 years was 3.56%, 183 bps lower than the yield available to investors today.

Economics

It was another busy week for economic data with a bevy of highlights. On Monday, we got an Empire Manufacturing print for that region that was better than feared but still showed contraction. Retail sales on Tuesday missed to the downside, and the release was also accompanied by downward revisions to previous months. It is too early to tell, but some economists believe that this could be the beginning of a sustained softening in consumer sentiment. On Thursday, we got housing data that showed new construction starts hit a four-year low. Lastly, on Friday, S&P’s data showed that U.S. services activity expanded in a broad-based way so far during the month of June. Positively, the survey also showed further softening of price pressures and a rebound in domestic manufacturing activity. Next week is pretty quiet on the data front until Thursday’s GDP and core PCE releases.

Issuance

The IG primary market rebounded this week as companies priced $31.4 billion of new debt – an impressive haul in a holiday-shortened week. We were unsure if issuance would really come through due to a spate of economic data and a looming summer slowdown, but Monday got the week off to a hot start as 13 issuers priced more than $21 billion. Next week, syndicate desks are looking for around $20 billion of issuance, but all it takes is one big issuer to push that total higher, much like we saw with Home Depot this week, which issued $10 billion on Monday to fund its acquisition of SRS Distribution.

Flows

According to LSEG Lipper, for the week ended June 19, investment-grade bond funds reported a net outflow of -$0.433 billion. This was the first outflow from IG funds in over a month, which have seen positive flows 22 of the past 25 weeks. YTD flows into IG stand at +$36.8 billion.

21 Jun 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 a third straight week of gains as investors continued to bet that the Federal Reserve will cut rates more than once this year, with retail sales data this week showing signs of consumer strain. Adding more evidence that the economy continued to slowdown, data for continuing claims, a proxy for the number of people receiving unemployment benefits, rose for a seventh straight week to 1.82m, just 1,000 shy of the highest level since the end of 2021, indicating the labor market is also cooling.
Yields were range-bound this holiday-shortened week and are poised to decline modestly for the third consecutive week. Yields closed at 7.90% on Thursday.
The primary market has seen a steady stream of borrowers this week. Six companies sold a little more than $3b in just three sessions
The month-to-date volume is $14b
The modest gains in the US junk bond market cut across all ratings, though CCC yields were set to climb for the fifth week in a row, closing at 12.54% on Thursday, the longest rising streak in more than two years
CCCs, however, scored gains of 0.04% on Thursday, and are likely to close the week with modest gains. The week-to-date gain stand at 0.16%
BBs are also on track for fourth week of positive returns, with week-to-date gains at 0.21%. BB yields fell five basis points week-to-date to 6.56%, also largely range bound, and may decline for the third week in a row
US high-yield debt issuers delivered a solid first quarter with elevated earnings and generally positive guidance, JPMorgan strategists led by Nelson Jantzen wrote in note last week
Even while credit metrics showed some modest erosion, leverage remains comfortably below the long-term average, Jantzen wrote

14 Jun 2024

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

CAM Investment Grade Weekly Insights

Credit spreads are slightly wider on the week. The Bloomberg US Corporate Bond Index closed at 90 on Thursday June 13 after closing the week prior at 88. Although this was the widest level for the index since late April, it is only 5bps off the tightest levels of the year which illustrates just how “unchanged” the index has been for the past month and a half. The 10yr Treasury yield is lower this week, trading at 4.20% this Friday morning after closing last week at 4.43%. Through Thursday, the corporate bond index YTD total return was +0.41% while the yield-to-maturity for the benchmark was 5.33%.

Economics

There was a bounty of economic data this week with the biggest events occurring on Wednesday and Thursday. Core CPI Inflation data for May was released on Wednesday morning, declining to +0.2% MoM relative to consensus of +0.3%. This deceleration was a welcome relief on the heels of some hotter prints earlier this year. However, this was just one data point and it does not make a trend. On Wednesday afternoon the FOMC released its policy decision with no change in the Fed Funds rate, as expected. The press conference was on script but there were some notable changes in the Summary of Economic Predictions (SEP aka The Dot Plot). The SEP showed slightly higher Fed inflation forecasts for 2024 and 2025 and a move in the median number of cuts for 2024 from 3 to 1. Interestingly, 4 of the 19 FOMC members are now expecting no cuts in 2024, which was up from 1 member in March. Recall that the SEP is released every three months so the next update will not occur until September 18. Thursday morning brought more good news on the inflation front as the PPI release showed that US producer prices declined in May by the most in seven months. PPI for May came in at -0.2% versus the estimate of +0.1% but nearly 60% of the decline in the May PPI for goods was due to declining gasoline costs. Next week is another busy one for economic data with empire manufacturing, retail sales, housing starts and global PMI, to name a few.

Issuance

The IG primary market was extremely slow this week as borrowers priced just $5.75bln in new debt. According to Bloomberg, excluding seasonality and holiday-shortened weeks, this was the lowest volume total since borrowers raised $4.25bln in the week ended 12/9/2022. The low issuance tally was really much ado about nothing: with CPI/Fed on Wednesday, that day was effectively closed to borrowers. Interest rate volatility plus the beginning of summer seasonality likely kept a few issuers at bay on the other days. Year-to-date issuance remains robust, standing at $803bln YTD, up +20% relative to 2023. Next week, dealers are calling for $25-$30bln in new supply. While we expect some issuance as borrowers look to take advantage of lower borrowing costs, we are skeptical that it will be that strong of a week given the busy economic calendar and the fact that bond and equity markets are closed on Wednesday in observance of Juneteenth.

Flows

According to LSEG Lipper, for the week ended June 12, investment-grade bond funds reported a net inflow of +$0.989bln. IG funds have seen positive flows 22 of the past 24 weeks. YTD flows into IG stand at +$37.2bln.

31 May 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 to reverse April’s losses and record modest gains for the month of May, shrugging off the supply deluge as yields held steady and spreads hovered near 300 basis points.
The primary market was inundated with new supply amid steady and near-historic tight spreads and attractive yields. The market priced more than $31b to make it the busiest month since September 2021. Attractive all-in yields acted as the stabilization factor for credit spreads, Barclays analysts Brad Rogoff and Dominique Toublan wrote earlier this month.
Tight spreads are here to stay amid the absence of big leveraged buyouts and corporate mergers, Rogoff and Toublan wrote in a separate report Friday morning, citing their meetings with clients at the leveraged finance conference last week
The supply deluge saw more than $13b price in the second week of May alone, the busiest week for issuance since October 2021. Two of the five weeks priced more than $10b
Yields were largely range-bound since the Fed meeting in early May after Fed Chair Powell indicated on May 1 that a hike in interest-rates was unlikely
Yields advanced to near 8% last week and crossed the 8% level this week after an array of Fed speakers turned hawkish and signaled that rates are likely to stay higher for longer
Vice Chair for Supervision Michael Barr said that policymakers need to hold interest rates steady for longer than previously thought in order to fully cool inflation
Cleveland Fed chief Loretta Mester, speaking at a panel moderated by Atlanta Fed President Raphael Bostic, said Tuesday that she wants to see “a few more months of inflation data that looks like it’s coming down” before cutting interest rates
Federal Reserve Bank of Minneapolis President Neel Kashkari warned that the policymakers at the Federal Reserve have not ruled out additional interest-rate increases
Atlanta Fed President Raphael Bostic said “ we still have a ways to go” to curb the significant price growth seen over the last few years
Yields on the broad US junk bond index were down 3 bps for the month, though they climbed above 8% after staying in the range of 7.80%-7.90%
BB yields dropped 12 basis points for the month to 6.77% after falling to 6.56% in the middle of the month, driving gains of 0.99% for May
But CCC yields surged to a four-month high of 12.49%, rising 21 basis points month-to-date. Still, CCCs amassed gains of 0.32% for the month
Single B yields fell 12 basis points to 7.84% and spreads were below 300 basis points, pushing gains of 0.76% for the months

17 May 2024

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds barely finished higher Thursday, the third time this week that’s been the case, but the market has yet to fall this week and is poised for its third up week in the past four.
An array of economic data this week signaled a slow start to 2Q for the US economy, spurring speculation Federal Reserve policymakers may gain confidence about starting to cut rates. The minutes for the latest FOMC meeting are due May 22.
The data have helped fuel risk-on sentiment, with equities briefly reaching record highs, and push down Treasury yields about 10 basis points this week.
CCCs have returned 0.44% so far this week with a yield of 12.27%.
BB yields have fallen 10 basis points to at a near-seven-week low of 6.57% while posting similar returns to CCCs.
Single B yields have dropped even more, 17 basis points to 7.55%, and returned 0.35% so far this week.
Issuance has slowed following last week’s bounty, with six borrowers selling more than $3b of new notes this week.
This week’s lighter supply helped bolster this week’s returns.
Barclays on Friday revised its year-end spread forecast for high yield to 295-315 basis points, implying total returns of 5%-5.5%.

(Bloomberg) US Inflation Ebbs for First Time in Six Months in Relief for Fed

A measure of underlying US inflation cooled in April for the first time in six months, a small step in the right direction for Federal Reserve officials looking to start cutting interest rates this year.
The so-called core consumer price index — which excludes food and energy costs — climbed 0.3% from March, snapping a streak of three above-forecast readings which spurred concern that inflation was becoming entrenched. The year-over-year measure cooled to the slowest pace in three years, Bureau of Labor Statistics figures showed.
The Fed is trying to rein in price pressures by weakening demand across the economy. Another report out Wednesday showed retail sales stagnated in April, indicating high borrowing costs and mounting debt are encouraging greater prudence among consumers.
While the figures may offer the Fed some hope that inflation is resuming its downward trend, officials will want to see additional readings to gain the confidence they need to start thinking about cutting interest rates. Chair Jerome Powell said Tuesday the central bank will “need to be patient and let restrictive policy do its work,” and some policymakers don’t expect to cut rates at all this year.
“It does open the door to a potential rate cut later in the year,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “It will take a few more readings indicating that inflation is coming down for the Fed to act.”
Traders boosted the odds of a September rate cut to about 60%.
Core CPI over the past three months increased an annualized 4.1%, the smallest since the start of the year.
Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.3% from the prior month and 3.4% from a year ago. Shelter and gasoline accounted for over 70% of the increase, the BLS said in the report.
Additionally, the advance in the CPI was driven once again by services like car insurance and medical care.
Shelter prices, which is the largest category within services, climbed 0.4% for a third month. Owners’ equivalent rent — a subset of shelter, which is the biggest individual component of the CPI — rose by a similar amount. Robust housing costs are a key reason why inflation not only in the US, but also in many other developed economies has refused to ebb.
The personal consumption expenditures price index, doesn’t put as much weight on shelter as the CPI does. That’s part of the reason why the PCE is trending closer to the Fed’s 2% target.
A report Tuesday showed producer prices rose in April by more than projected, but key categories that feed into the PCE were more muted. Combined with CPI components that also inform the PCE calculation, economists expect that measure to come in softer when April data is released later this month.

17 May 2024

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

CAM Investment Grade Weekly Insights

Credit spreads have exhibited little change this week. The Bloomberg US Corporate Bond Index closed at 87 on Thursday May 16 after closing the week prior at the same level. The 10yr Treasury yield is lower this week, trading at 4.42% this Friday afternoon after closing last week at 4.50%. Through Thursday, the corporate bond index YTD total return was -0.74% while the yield-to-maturity for the benchmark was 5.44% relative to its 5-year average of 3.69%.

Economics

It was an action-packed week for data with a hot Producer Price Index (PPI) print kicking things off on Tuesday. Market participants were on guard following PPI as many were expecting a similar surprise to the upside for the Wednesday CPI release. Instead, we got a relatively benign CPI number with weaker than expected inflation. Wednesday also saw a retail sales release which showed a decline in April and it was also accompanied by downward revisions for sales during the first quarter. The inflation and sales releases are dovish indicators and Treasury yields subsequently declined after those Wednesday releases, recouping some of the sell-off in rates that occurred after the hot PPI release early on Tuesday. The next couple weeks are relatively light on the data front and the next Fed meeting on June 12 will be here before we know it.

Issuance

The IG primary market saw good activity on the week as 21 companies sold just over $28bln in new debt. Syndicate desks are looking $25bln next week but that number could surprise to the upside as earnings season is winding down and there is no major economic data that will preclude issuers from tapping the market on any given day. Year-to-date issuance stands at $719.8bln, well ahead of last year’s pace.

Flows

According to LSEG Lipper, for the week ended May 15, investment-grade bond funds reported a net outflow of -$1.04bln. IG funds have seen positive flows 18 of the past 20 weeks. YTD flows into IG stand at +$33.6bln.

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