Insight – Cincinnati Asset Management

17 Jan 2025

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 the biggest weekly gain in more than two months after rallying for three straight sessions on optimism that inflation is easing and the Federal Reserve is likely to cut rates.
The core consumer price index came in lower than anticipated this week, reviving hopes for the next rate cut to take place as early as March. Fed Governor Christopher Waller supported the sentiment further, saying the central bank could lower interest rates in the first half of 2025.
US junk bond yields fell 18 basis points in four sessions, closing at 7.34% on Thursday
CCCs are set for 0.7% weekly gains, the best reading in more than two months
BB yields, the most rate-sensitive part of the junk bond market, are poised for a weekly drop
BBs are looking to gain 0.59%, the most since early November
The high yield bond rally this week was partly driven by light supply, with the volume at a modest $7b so far in January
The demand for all-in yield remains solid and is expected to continue through the first half of 2025, Barlcays strategists Brad Rogoff and Dominique Toublan wrote in a note this morning
Fundamentals remain strong across the high yield market, Barclays wrote, with the 2025 default forecast fairly benign

17 Jan 2025

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

CAM Investment Grade Weekly Insights

Credit spreads for most bonds were unchanged on the week as the Index has exhibited little movement in either direction thus far in 2025. The Bloomberg US Corporate Bond Index closed at 80 on Thursday January 16 after closing the week prior at the same level. The 10yr Treasury made a meaningful move lower in yield this week on the back of cooler than expected inflation data. The benchmark yield moved from 4.76% last Friday to 4.61% at the close on Thursday January 16. Through Thursday, the Index year-to-date total return was -0.06% while the yield to maturity for the Index closed the day at 5.37%.

Economics

The economic calendar was busy this week. First CPI came in as a modest surprise to the downside with core CPI coming in softer than expectations. This sparked a rally in Treasuries, driving rates lower. December retail sales were solid, boosting investor confidence in the consumer, but the number was not so good that it ignited fears about the economy overheating. Finally, the housing market showed signs of life on Friday morning with the release of December housing starts data that surprised to the upside in a big way. The housing data wasn’t all roses though as permits did decline signaling that early 2025 releases may not keep pace with December. Next week is pretty light on data with no significant economic releases. Looking further ahead, the next FOMC decision is on January 29. Interest rate futures markets were pricing in a >99% chance that the Fed will hold rates steady at that meeting at the time of our publication.

Issuance

It was a busy week for issuance this week as the banking sector started to report earnings, freeing up their chance to issue new debt. Weekly volume topped the $40bln estimate, coming in just shy of $57bln as Bank of America printed $10bln of new debt on Friday on the heels of $25bln of bank issuance on Thursday. Next week the bond market is closed on Monday in observance of Martin Luther King Jr. Day. Dealers expect $25bln of issuance next week but we would not be surprised to see a larger number amid a constructive funding environment.

Flows

According to LSEG Lipper, for the week ended January 15, investment-grade bond funds reported a net inflow of +591.8mm. Total year-to-date flows into investment grade funds were +$3.01bln.

14 Jan 2025

High Yield Quarterly, Insight CAM Team 0 comment

2024 Q4 High Yield Quarterly

January 2025

In the fourth quarter of 2024, the Bloomberg US Corporate High Yield Index (“Index”) return was 0.17% bringing the year to date (“YTD”) return to 8.19%. The S&P 500 index return was 2.39% (including dividends reinvested) bringing the YTD return to 25.00%. Over the period, while the 10 year Treasury yield increased 79 basis points, the Index option adjusted spread (“OAS”) tightened 8 basis points moving from 295 basis points to 287 basis points.

With regard to ratings segments of the High Yield Market, BB rated securities tightened 1 basis point, B rated securities tightened 8 basis points, and CCC rated securities tightened 84 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 396 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 Transportation, Communications, and Brokerage sectors were the best performers during the quarter, posting returns of 1.79%, 1.47%, and 1.00%, respectively. On the other hand, REITs, Utilities, and Capital Goods were the worst performing sectors, posting returns of -1.54%, -1.17%, and -0.68%, respectively. At the industry level, railroads, wirelines, and media all posted the best returns. The railroads industry posted the highest return of 6.57%. The lowest performing industries during the quarter were healthcare REITs, health insurance, and office REITs. The healthcare REITs industry posted the lowest return of -5.04%.

The year concluded with strong issuance during Q4 after the very strong issuance during the first three quarters of the year. The $67.6 billion figure is the most volume for a fourth quarter in three years. Of the issuance that did take place during Q4, Discretionary took 25% of the market share followed by Financials at 22% share and Communications at 12% share.

The Federal Reserve did lower the Target Rate at the November meeting and the December meeting. There was no meeting held in October. That brings the current Fed easing cycle to 100 basis points in total cuts. They kicked off this cycle with a 50 basis point cut at their September meeting. The Fed dot plot continues to moderate for 2025 now showing only 50 additional basis points of cuts expected for the year. Market participants are forecasting a bit more aggressive Fed and are expecting 83 basis points in cuts for 2025.¹ After the cut at the December meeting Fed Chair Jerome Powell commented, “With today’s action, we have lowered our policy rate by a full percentage point from its peak and our policy stance is now significantly less restrictive.” Powell continued, “We can therefore be more cautious as we consider further adjustments to our policy rate.”² While the Fed is on track to continue cutting rates, they are looking for more progress on inflation before making another move lower. Further, at this juncture, the Fed is comfortable with the current state of the labor market.

Intermediate Treasuries increased 79 basis points over the quarter, as the 10-year Treasury yield was at 3.78% on September 30th, and 4.57% at the end of the fourth quarter. The 5-year Treasury increased 82 basis points over the quarter, moving from 3.56% on September 30th, to 4.38% at the end of the fourth 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 third quarter GDP print was 3.1% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2025 around 2.1% with inflation expectations around 2.5%.³

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 Q4, our higher quality positioning was a drag on performance as lower rated securities significantly outperformed. Further, Index performance was driven by maturity buckets of 3 years and shorter. Additional performance detractors were our credit selections within the capital goods sector and our underweight in the communications sector. Benefiting our performance this quarter were our credit selections in the banking sector, consumer products industry, and consumer cyclical services industry. Another benefit was added due to our underweight in the REITs sector.

The Bloomberg US Corporate High Yield Index ended the fourth quarter with a yield of 7.49%. Treasury volatility, as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index), remains elevated from the 78 index average over the past 10 years. The current rate of 98 is well below the spike near 200 back during the March 2023 banking scare. The MOVE Index does show a general downward trend over the last two years. Data available through November shows 29 bond 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 bond default rate is 1.80%.⁴ The current default rate is relative to the 2.38%, 2.67%, 2.15%, 1.85% default rates from the previous four quarter end data points listed oldest to most recent. Defaults are ticking lower and the fundamentals of high yield companies are in decent shape. From a technical view, fund flows were positive in the quarter at $6.6 billion.⁵ 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 have moved lower, and issuance remains robust. GDP still looks good. Three months back the labor market appeared a bit wobbly, but it has proved resilient. There are some concerns regarding the consumer, and the Fed is eyeing a bit of needed inflation improvement. Looking ahead, the new US administration should keep things interesting. The Fed is evaluating the impact of potential presidential policies but have not yet incorporated them into any decision making saying that it is “very premature.” In other words, the Fed is data dependent. 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/.

Footnotes

Bloomberg January 1, 2025: World Interest Rate Probability

Bloomberg December 18, 2024: Powell Says Future Cuts Would Require Fresh Inflation Progress

Bloomberg January 1, 2025: Economic Forecasts (ECFC)

Moody’s December 16, 2024: November 2024 Default Report and data file

Bloomberg January 1, 2025: Fund Flows

14 Jan 2025

Insight, Investment Grade Quarterly CAM Team 0 comment

Q4 COMMENTARY & 2025 OUTLOOK

January 2025

It was a solid year for investment grade credit as most companies were able to expand revenues while maintaining healthy balance sheets. These feats were accomplished largely thanks to a U.S. economy that continued to grow. Investment grade posted positive returns during the full year 2024, but the 4th quarter of the year was underwhelming as Treasury yields moved higher which weighed on returns.

2024 Year in Review

During 2024, the option adjusted spread (OAS) on the Bloomberg US Corporate Bond Index tightened by 19 basis points to 80 after it opened the year at a spread of 99. Lower quality portions of the investment grade universe outperformed higher quality, as investors reached for yield amid a historic level of spread tightening. Intermediate credit outperformed longer duration credit due to Treasury yields moving higher throughout the year.

Spread and coupon performance carried the day for corporate bonds in 2024. As bond investors we measure “excess return” as the total return of a corporate bond minus the total return of the underlying government bond. Excess return for the Corporate Index was +2.46% for the full year 2024, more than the total return for that Index of +2.13%. This means that the underlying Treasury performance was negative (due to Treasury yields moving higher) and that corporate bonds were able to overcome this and post positive total returns thanks to spread tightening and the higher coupon income that is available in corporate bonds relative to Treasuries. Suitability is unique to each investor but for investors than can tolerate a modest amount of credit risk, 2024’s performance shows that portfolios can benefit by placing a preference on actively managed IG corporate bonds relative to just Treasuries alone.

The best performing industries in 2024 were Airlines and Finance Companies. Railroads and Other Industrial were the two biggest underperformers relative to the Index. The majority of industries posted positive total returns for the full year with just a handful of negative performers.

Interest rates were volatile during 2024, particularly in the intermediate and shorter portions of the yield curve. The 10yr Treasury ended 2024 at 4.57% after opening the year at 3.88%. Looking at the front end of the curve, the 2yr Treasury finished the year at 4.24%, which was just one basis point lower than where it ended 2023; but that does not tell the whole story of just how volatile this security was during 2024. The 2yr traded above 5% at the end of April and then as low as 3.54% in the days following the Fed’s first rate cut in the latter half of September. The 2yr then climbed to 4.24% at year-end as traders began to acquiesce to the Fed’s messaging about a more cautious path of its easing cycle and the belief that rate cuts may play out over a longer time than initially anticipated. The 5yr Treasury finished the year 53bps higher than where it began, but it traded within a range of a whopping 132bps. The 5yr traded near its low of 3.40% just prior to the September Fed meeting before moving higher during the final 3 months of the year, finishing at 4.38%.

Looking at the two charts pictured above, the most important takeaway for investors and active bond mangers is the fact that the 2/10 Treasury curve ended its 793-day inversion streak in early September. The curve had been inverted since July of 2022 and this was the longest period of inversion on record. While 2/10 inversion has typically been a harbinger of recession, thus far the U.S. economy has managed to stay on solid footing. Only once previously has an inverted yield curve failed to precede a recession, during the brief period of inversions surrounding the Russian ruble crisis in 1998. A steep curve is helpful to active managers allowing them to effect economic sale-and-extension trades while also exposing investors to the power of curve rolldown and its ability to magnify returns.

2025 Outlook

We have a favorable view of the potential for investment grade to generate attractive returns in the year ahead. The likelihood of additional spread compression is probably limited given the market is trading near the tight end of historical valuations. For us, much like we wrote at the end of 2023 and every quarter thereafter, it is the all-in yield that currently makes the asset class compelling on both an absolute and relative basis. The average yield on the Index over the past 10 years was 3.67% and it finished 2024 at 5.34%, which is higher from the end of 2023 when it was 5.06%.

On a relative basis, by one metric, equities are at their most overvalued versus corporate credit and Treasuries since 2008. A recent Bloomberg study compared the earnings yield on S&P 500 shares (3.7%) to the yield to worst of the Bloomberg BAA Corporate Index (5.6%), finding a gap of 190 basis points as of January 6, 2025.¹

The S&P 500 earnings yield is typically greater than the yield for corporate bonds to compensate investors for the additional risk associated with equities. It is worth noting that this is just one data point and this metric was negative for the entirety of the 1990s before turning positive in 2003. Still, we think that investors should take note of this development –high quality bonds screen cheap to other risk assets on a relative basis which suggests they may deserve a larger slice of an investor’s overall asset allocation.

Overall, investment grade credit metrics remained healthy in 2024 and are poised to follow a similar path in 2025. According to research compiled by Barclays, at the end of the third quarter 2024, net leverage for the Index was 3.0x, up 0.2x year over year and interest coverage was 11.7x, a deterioration of 1.3x from the prior year. Meanwhile, EBITDA growth was positive through the first three quarters of 2024 and EBITDA margins moved up a full percentage point over the past year to 30.6%, a new all-time high.² The best way to describe credit metrics as we head into 2025 is “stable” which is what we like to see. As an active manager with a relatively concentrated portfolio, we are less concerned with the overall universe and instead focus on a relatively small number of issuers that populate our investor portfolios.

Portfolio Positioning

We are consistent in our approach to portfolio management which means that we are not making wholesale changes to our strategy from one year or quarter to the next. We provide value to our investors by assembling customized separately managed accounts consisting of thoroughly-researched individual bonds. There are several tenets that our investors can count on with CAM’s Investment Grade Strategy:

Diversification: Each individual account is initially populated with approximately 20-25 positions. This results in a portfolio that is concentrated relative to the Index but still achieves sufficient diversification at the sector/industry levels. Each account is populated with our best ideas during an invest-up period that takes 6-8 weeks to complete which we refer to as an abbreviated economic cycle.

Overweight High Quality: CAM targets a cap for each account at a 30% exposure to BAA-rated bonds, which represent the riskier portion of investment grade universe. The Index had a 47.66% weighting in BAA-rated credit at the end of 2024.

Intermediate Maturity: We will always seek to position the portfolio within an intermediate maturity band that ranges from 5-10 years, although we may occasionally hold bonds shorter than this if warranted by market conditions. At year end 2024 our composite had a modified duration of 5.49 relative to the Index duration of 6.98.

The above framework helps us achieve the goal of our process which is to provide a customized portfolio with a return that is as good or better than the Index while incurring less volatility and prioritizing preservation of capital.

The biggest “change” of note in 2024 was more of a normalization than a pivot in strategy. We have benefited from the aforementioned re-steepening of the yield curve and its impact on our ability to engage in economic sale-and-extension trades. Simply put, it has been much more attractive for us to execute these trades thus allowing our portfolio turnover to rebound to levels more consistent with historical averages. Those investors that have been with us for a number of years have likely noticed this activity; those that have been with us for 2 or 3 years are likely to see an increase in sale activity in 2025 if market conditions remain copacetic.

As we look ahead to 2025, we are actively avoiding individual companies with exposure to geopolitical destabilization and we continue to have no exposure to leisure, lodging, restaurants or gaming. We also have a significant underweight on retailers.

FOMC Taking a Deliberate Approach

The Fed delivered 100bps of rate cuts in 2024, occurring across 3 meetings in the final 3.5 months of the year. The overarching theme of the moment is forward expectations for the path of easing, as the Fed has been careful to dial back its stance on future cuts amid sticky inflation, strong consumer spending and a resilient labor market. With the December FOMC meeting came the quarterly update of the Fed’s ballyhooed “Dot Plot” showing a median estimate of two rate cuts in 2025, down from the four previously projected in the September release. The December FOMC meeting minutes were released on January 8, showing the nuts and bolts of the Fed’s cautious view of the year ahead:
“In discussing the outlook for monetary policy, participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing” and “In addition, many participants suggested that a variety of factors underlined the need for a careful approach to momentary policy decisions over coming quarters.”³
We think that the Fed is taking a prudent approach, especially with the amount of uncertainty from the incoming Trump administration on trade, tariffs, immigration, taxes and foreign policy. The Fed always has the option to reverse course and cut its policy rate more aggressively if the economy slows.

A Year of Opportunity

As we have written before, when it comes to interest rates, “higher for longer” is not negative for bond investors. Clipping coupons in excess of 5% for healthy IG-rated companies is an attractive value proposition. However, we believe that higher rates will continue to weigh on certain sectors of the economy such as housing and have an outsize impact on small businesses which are critical to the health of the U.S. economy. At the end of 2023 we wrote that we thought a recession was likely in 2024 or sometime in 2025. Obviously, that has not come to fruition and while sticking with that call would be deeply out of consensus, we continue to forecast a reasonable chance of recession. One scenario that could land us there is if the economic backdrop deteriorates and the Fed is too slow to react. Other recession scenarios could be borne out by geopolitical issues or by the unintended consequences of political policies or the growing U.S. deficit. We are inherently cautious in the face of these uncertainties. Preservation of capital is at the forefront of our investment grade strategy so we are always positioning the portfolio to mitigate the impact of economic downturns. At the end of the day, investing is always about being appropriately compensated for risk –in the current environment we view the modest compensation for incremental risk to be insufficient. We will continue to focus on blocking and tackling while populating investor portfolios with companies that can persevere in a variety of economic environments.

Thank you for your continued interest and support. We wish you all the best in 2025 and look forward to a successful 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. 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.

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/

Footnotes

Bloomberg News, January 7 2025 “Credit Markets Signal Warning for a Relentless Equity Rally”

Barclays Bank PLC, December 16 2024 “US Investment Grade Credit Metrics, Q3 24 Update: Likely Peaked”

FOMC Federal Reserve System, January 8 2025 “Minutes of the Federal Open Market Committee: December 17-18, 2024”

03 Jan 2025

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds rose for a third day Thursday, with the 17% return the highest in five weeks and 2024 standout CCCs continuing to lead the way.
That riskiest segment of the high-yield market notched an eighth-straight session of gains, and the 0.2% advance Thursday was the most since Nov. 21
Yields tumbled 10 basis points to 10.06%
Overall, US junk is heading for a second-consecutive up week while yields have dropped six basis points to 7.44%
The broad gains are partly due to light trading volume in light of the year-end holidays
Market sentiment looks solid this morning ahead of manufacturing PMI data, with US equity futures rising as stocks look to end a five-day losing streak
Meanwhile, the primary market is expected to get going next week as traders and bankers return to their desks

06 Dec 2024

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

CAM Investment Grade Weekly Insights

Credit spreads traded sideways this week, remaining near year-to-date tights. The Bloomberg US Corporate Bond Index closed at 78 on Thursday December 5 after closing the week prior at the same level. The 10yr Treasury is less than 1bp higher over the course of the past week, closing at 4.169% last Friday and 4.176% through Thursday. Through Thursday, the corporate bond index year-to-date total return was +4.49%. The yield to maturity for the IG corporate bond index closed at 5.02% on Thursday.

Economics

The economic calendar had numerous releases this week but there were no meaningful surprises. The big data point of the week was the employment report on Friday morning which was solid but not spectacular. Taking it altogether, the data this week kept the Fed on course to cut rates at its meeting on December 18. Interest rate futures were pricing a 91% chance of a cut as of 10:00am on Friday morning. This was up from 66% a week ago. Looking ahead to next week, the biggest economic release is CPI on Wednesday morning.

Issuance

Issuance this week was in-line with expectations as 27 companies priced $23.2bln in the primary market relative to the consensus estimate of $25bln. This type of volume is considered very health for the month of December when the calendar can tend to be more inconsistent than other months. Syndicate desks are looking for $15bln of issuance next week which will likely be biased toward Monday-Tuesday as companies look to get ahead of Wednesday’s CPI print.

Flows

According to LSEG Lipper, for the week ended December 4, investment-grade bond funds reported a net inflow of +$2.04bln. Total year-to-date flows into investment grade funds were +$78bln.

06 Dec 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 modest weekly gains for the third consecutive week after climbing for six sessions in row. The gains come after a string of data showed a resilient economy and that was reinforced after Federal Reserve Chair Jerome Powell said the economy is “in remarkably good shape,” adding growth has been stronger than previously believed.
The gains, though modest, cut across ratings, as equities rallied on expectations of lower taxes and lighter regulations after Trump’s nomination to head the Treasury and the Securities Exchange Commission.
The demand for all-in yield, a key driver for spread compression in 2025, should be sustained into 2025, wrote Barclays strategists Brad Rogoff and Dominique Toublan on Friday. Although some widening from current tight levels may be expected, especially in the second half of the year, strong technicals and a defensive index composition should keep high-yield spreads contained, Rogoff and Toublan added
Supported by attractive all-in yields, anticipated rate cuts, rotation from money markets and rebalancing from equities should keep demand strong for credit in 2025, Barclays wrote
Junk bond yields declined six basis points so far this week and are on track for third weekly drop. Spreads tightened five basis points in the last four sessions
The broad gains in the US junk bond market were also partly due to light primary calendar
The week has priced about $5b so far after a light November. November priced $9b to make it the slowest month for supply since July 2023
Thursday was the busiest day since Oct. 24 pricing $2.4b.
Light supply is also driving big demand for new issues as investors look for paper to put money to work
The calendar remains light, with just one deal on deck
BB yields fell four basis points in the last four sessions and is set for third weekly decline, should this trend hold
Single B yields closed at 7% and spreads unchanged at 248. Single Bs are also poised to notch up gains for the third week in a row

22 Nov 2024

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

CAM Investment Grade Weekly Insights

Credit spreads were largely unchanged during the week. The Bloomberg US Corporate Bond Index closed at 78 on Thursday November 21 after closing the week prior at the same level. The 10yr Treasury was also little changed during the period, closing at 4.44% last Friday and 4.42% this Thursday. Through Thursday, the corporate bond index year-to-date total return was +2.50%. The yield to maturity for the IG corporate bond index closed at 5.25% on Thursday.

Economics

It was an extremely light domestic economic calendar this past week with little of note. Next week brings much more data to parse and Wednesday in particular is action packed with releases for GDP, personal consumption, consumer spending, durable goods and Core PCE. This is the last time the Fed will get a look at its preferred inflation gauge prior to the FOMC rate decision on December 18. As of Thursday evening, interest rate futures were pricing in a 56% chance of a 25bp cut at the December meeting.

Issuance

It was a brisk week for issuance as borrowers brought nearly $37bln of new debt to market. Next week dealers are projecting $15-$20bln of issuance. If that tally comes to fruition, then we would expect the bulk of that supply to occur on Monday before activity starts to slow as the calendar progresses toward the Thanksgiving holiday.

Flows

According to LSEG Lipper, for the week ended November 20, investment-grade bond funds reported a net inflow of +$4.6bln. This was the largest weekly inflow since January of 2023. Total year-to-date flows into investment grade funds were +$75.3bln.

22 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 set to cautiously rebound from last week’s losses after notching up gains for four sessions in a row. The market has reconciled to a slower pace of Federal Reserve interest rate cuts against the backdrop of steady growth and resilient labor market.
Junk bonds rebounded across ratings, led by CCCs, the riskiest part of the high yield market. CCC yields plunged to a new low of 9.82%, the lowest since April 2022 and falling 25 basis points in four days. The risk premium for CCCs tumbled to 523 basis points, a three-year low, as spreads tightened for four consecutive sessions.
CCCs are on track to be best performing asset class, with gains of 0.47% so far this week after rallying for four straight sessions.
Tightening spreads, attractive yields, steady growth against the backdrop of easing interest-rates kept the primary markets busy, with eight companies together selling $4b in new bonds. The November tally is nearly $9b
The broader index yields dropped six basis points this week so far to close at 7.23%. Spreads closed at 258 basis points, down eight basis points for the week
The post-Thanksgiving period tends to be positive for risk assets, with spreads tightening in ten of the past fourteen years, Barclays strategists Brad Rogoff and Dominique Toublan wrote Friday. They expect similar performance this year. But tight starting spreads, elevated complacency, and some soft spots in earnings could limit the upside, they warn
Though the momentum of the post-election rally faded, the slow but steady rebound this week on renewed expectations of less stringent regulations and lower taxes bolstered risk appetite, drawing high-risk pay-in-kind bonds in the primary market from RR Donnelley, commercial printing service provider.

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.

12…59 Next →