Category: Insight

(Bloomberg)  High Yield Market Highlights

• US junk bonds continued to retreat on renewed concerns prompted by tariffs on automakers that could provoke a large scale trade war, nullifying the impact of data showing US economy expanded faster-than-expected in the fourth quarter of last year.
• The market stumbled for the second straight session on Thursday as yields surged six basis points to a two-week high of 7.63% and spreads widened eight basis points to 322. It is on track for a modest weekly loss of 0.19% after notching up declines in two of the last four sessions.
• The impact of auto tariffs was immediate in the high-yield primary market as it triggered widepread worries that autopart maker Forvia may be forced to withdraw its debt offering. All outstanding auto bonds across the auto sector plummeted
• While imposing a 25% tariff on automakers, the US also threatened harsher penalties on the EU and Canada should they unite against the US and impose reciprocal taxes, escalating market volatility and stamping down risk appetite
• Amid pandemonium in the equity markets and all the noise around tariffs, the junk bond primary market continued to do business
• US borrowers are rushing to sell debt amid concerns that growth could slow and dampen risk appetite sooner than later
• Tuesday was the busiest since January in the primary market
• The losses in the secondary market spanned across ratings. CCC yields rose to 10.57%, prompting a loss of 0.16% on Thursday
• BB yields climbed to 6.39% and spreads rose above 200 basis points, pushing a loss of 0.17% on Thursday. BBs are also on track to post a modest loss this week
• The losses were sparked by renewed worries about tariffs fueling inflation and forcing the Federal Reserve to keep rates higher for longer, disrupting growth and employment
• Boston Fed President Susan Collins joined the chorus and said it looks “inevitable” that tariffs will boost inflation, at least in the near term, adding it’s likely appropriate to keep interest rates steady for longer.
• Earlier in the week, Minneapolis Fed President Neel Kashkari said inflation is “above our 2% target” and so the central bank has a lot of work to do to lower that
• And Alberto Musalem, President of Louis Fed, said it’s not clear any inflationary impact from tariffs will prove temporary, and he cautioned that secondary effects could prompt officials to hold interest rates steady for longer

(Bloomberg)  US Consumer Spending Barely Rises, Key Inflation Gauge Picks Up

• Consumer spending was weaker than expected again in February while a key inflation metric picked up, in a double whammy for the economy before the brunt of tariffs.
• Inflation-adjusted consumer consumption edged up 0.1%, below all but one estimate from economists, after a slump January that analysts mostly blamed on bad weather. Notably in February, Americans reduced spending on services for the first time in three years in the face of higher prices — including on dining out.
• “Consumers are resistant to price increases,” Neil Dutta, head of US economics at Renaissance Macro, said in a note. “Ultimately, inflation boils down to a household’s budget constraint and conditions are deteriorating here.”
• The Federal Reserve’s preferred inflation rose 0.4% from January, the most in a year, according to Bureau of Economic Analysis data out Friday. The so-called core personal consumption expenditures price index, which excludes food and energy items, was up 2.8% from last year, remaining stubbornly above the Fed’s 2% target.
• The report points to sticky inflation just as President Donald Trump’s planned tariffs risk stoking price pressures even further.
• The Fed’s own forecasts underscore those fears, as policymakers signaled slower growth and faster inflation in fresh projections released at last week’s policy meeting. Chair Jerome Powell downplayed those concerns, even reviving the loaded word “transitory” to describe his expectations for tariff-driven inflation.
• Officials are holding interest rates steady until they have a better sense of Trump’s policies — particularly tariffs, ahead of next week’s big rollout that the president has dubbed “Liberation Day.” While Trump imposed some levies on China last month, they didn’t seem to have much of an impact on price data, as consumer and producer prices both stepped down in February.
• Much of the tariff impact to prices would come through goods. A measure of goods inflation that excludes food and energy climbed 0.4% for a second month in February, the biggest back-to-back advance since 2022. Core services prices — a closely watched category that excludes housing and energy — rose at a similar pace.
• But spending on goods did bounce back in February on demand for durable goods like cars — perhaps a sign that some consumers are buying ahead of potential tariffs. Among services, a category that had been a consistent driver of spending growth in recent years, consumers reduced spending on veterinary services, as well as taxis and ridesharing.

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

(Bloomberg)  High Yield Market Highlights

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

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

(Bloomberg)  High Yield Market Highlights

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

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

(Bloomberg)  High Yield Market Highlights

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

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

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

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

(Bloomberg)  High Yield Market Highlights

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

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

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

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