Insight – Cincinnati Asset Management

12 Apr 2024

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

CAM Investment Grade Weekly Insights

Spreads inched tighter during the week with the Bloomberg US Corporate Bond Index at its narrowest level of the year. The index closed at 87 on Thursday April 11 after having closed the week prior at 89. The 10yr is trading at 4.52% this Friday morning after closing last week at 4.40%. Through Thursday, the index YTD total return was -2.40% while the yield-to-maturity for the benchmark was 5.62% relative to its 5-year average of 3.65%.

Economics

It was an active week for economic data with the highlight of the week being another firmer than anticipated CPI print on Wednesday. This caused a sell-off in Treasuries with the 2-year leading the way as its yield finished the day 23bps higher. At the end of Wednesday, rates across the board were at the highest levels of 2024 but have since come off the highs and the entire curve is rallying to the tune of about 10bps as we go to print this Friday morning. These short term moves should not distract corporate bond investors from the bigger picture: this is an asset class that is well poised to deliver solid returns in the future, in our opinion. This entire year we have been saying that we felt that the bar was quite high for the Fed to begin cutting rates because the economy was simply too strong and the economic data too good. We were quite puzzled in January when interest rate futures were pricing 6 or 7 cuts despite a Fed dot plot that indicated 3 cuts at the median. The market has now come around to our view with futures pricing just shy of 2 cuts in 2024 as of this Friday morning. It is clear from its messaging that the Fed wants to cut and we know it is coming at some point. We believe that cuts would be a positive for our strategy as we think that it would be an important catalyst for Treasury curves to regain some upward positive slope. The Fed will cut when the data that it depends on will allow it to cut. It is as simple as that. In the interim, we believe that this backup in rates has created an opportunity for long term credit investors. We would not be surprised if we were to look back a year or two from now and long for the yields that are available to corporate credit investors today.

Issuance

Issuance was in-line with estimates on the week as companies priced $20.2bln of new debt. Next week dealers are estimating $30bln of new supply with banks leading the way as they report earnings and exit their blackout periods. Year-to-date issuance stands at $573.7bln, up 39% relative to 2023.

Flows

According to LSEG Lipper, for the week ended April 10, investment-grade bond funds reported a net inflow of +$3.2bln. This was the 17^th consecutive weekly inflow for IG funds. YTD flows into IG stand at +$33.3bln.

12 Apr 2024

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds are headed for their second straight weekly loss as yields jump to a four-month high after the March core consumer price index rose for the third straight month, fueling fresh concerns that the Federal Reserve could delay interest-rate cuts to the end of year.
Junk-bond yields breached the 8% level, climbing to 8.02% on 04/11. Week-to-date losses hit 0.47% after the biggest one-day loss in two months on Wednesday. Losses spanned across ratings as investors pulled cash out of the asset class.
On Thursday, the producer price index also rose 2.1% from a year earlier, the biggest gain in 11 months, though some of the incorporating data sets in this index were a touch softer offering some relief after the surprise rise in the consumer price index
BB yields advanced to a new four-month high of 6.83% and are poised to rise for the third week in a row. Yields have risen 19 basis points in the last four sessions, prompting a loss of 0.55% this week so far
BBs are on track to end the week with losses and could be the biggest since mid-January
CCC yields rose 25 basis points since last Friday to 12.37%, a more than six-week high. Rising yields also pushed week-to-date losses to 0.28%.
Spreads held steady even while US Treasury yields soared. The 10- and 5-year US Treasury yields have risen 18 and 23 basis points, respectively, since last Friday to close at 4.59% and 4.63%
With much of the credit investor base focused on yield buying, spreads have benefited from the rate impact on all-in yields, Brad Rogoff and Dominique Toublan of Barclays wrote in a Friday note
Junk bond spreads closed at 301 basis points, a drop of 2 basis points week-to-date
BB spreads were still far below 200 basis points at 185, unchanged for the week
CCC spreads closed at a two-year low of 714 basis points, down just five basis points
Attractive yields and still-tight spreads against the backdrop of a strong and resilient economy drew borrowers into the market
April supply is near $13b and year-to-date at $97b

10 Apr 2024

Insight, Investment Grade Quarterly CAM Team 0 comment

2024 Q1 Investment Grade Quarterly

The first quarter of the year saw enthusiastic investor demand for investment grade corporate bonds and tighter credit spreads. Spread performance was offset by Treasury yields that drifted higher throughout the quarter as economic data and Federal Reserve messaging made it increasingly clear that the Fed would be more deliberate with rate-cuts than what the market had anticipated at the beginning of 2024. Taking it all together, it was a modestly negative quarter of total returns for IG credit but this is an asset class that best lends itself to a longer term view. We believe that the current environment presents an opportunity. Elevated Treasury yields and strong credit metrics across the IG universe have the potential to generate attractive risk-adjusted returns for IG credit investors over a longer time horizon.

First Quarter Review

The option adjusted spread (OAS) on the Bloomberg US Corporate Bond Index opened the year at 99 and it briefly traded wider during the first 7 trading days of the year before the mood improved to the point that it would never again trade cheap to its opening level for the duration of the first quarter. The index traded as tight as 88 near the end of March, its narrowest level since November 2021, before finishing the quarter at an OAS of 90. Perhaps the most surprising aspect of this movement toward tighter spreads is that it occurred amid a record breaking deluge of new issue supply as borrowers printed $529 billion in new IG-rated corporate debt during the quarter.ⁱ

Sometimes a large amount of new issuance within a small window of time can have the effect of pushing credit spreads wider as investors sell existing holdings to make room for new issue allocations. For example, in 2020 and 2022, when 1Q new issue supply exceeded $450mm, it was accompanied by a meaningful move wider in credit spreads. However, that was not the case in 2024 as investor demand was robust and IG fund flows were solidly positive which was supportive of both tighter spreads and a robust market for new issuance.

Moving on to Treasury yields, they were higher across the board in the first period of the year which sapped some momentum from total returns.

Although we don’t like to see rates move higher because of the short term headwinds it creates for performance, we think that higher yields present an opportunity for investors to be compensated for taking intermediate duration risk. Yields remain elevated relative to the recent past –the yield to maturity (YTM) for the Corporate Index closed the first quarter at 5.30% which was 180 basis points higher than its average YTM of 3.50% over the past 10 years.

The Market Fought, but the Fed Always Wins

In our January commentary we wrote that we believed that the bar was high for near term rate cuts and our view remains the same. At the beginning of the year Fed Funds Futures were implying seven 25bp rate cuts in 2024 for a total of 1.75%. Investors speculated that the first cut would occur at the March meeting with an additional cut at every meeting thereafter (the FOMC holds 8 regularly scheduled meetings per year).ⁱⁱ This is what interest rate futures were pricing in early January despite the fact that in December the Fed released its “Summary of Economic Projections” (SEP) which included the dot plot showing just 0.75% worth of rate cuts in 2024. To be fair, the Fed bears some responsibility for the market exuberance in January thanks to its dovish messaging on the heels of the December FOMC meeting.

As the first quarter wore on, the market slowly came around to the idea that the Fed may tread lightly, decreasing its policy rate more cautiously than expected. As it does every three months, the Fed issued an updated SEP at its March 2024 meeting which was slightly more hawkish than the December release but it still showed 0.75% worth of rate cuts in 2024. At the end of the first quarter, Fed Funds Futures mirrored the most recent March dot plot implying a 56.9% chance of a cut at the June meeting with 2 additional cuts to follow at the September and December meetings.ⁱⁱⁱ This is a much more realistic view of what is likely to occur in our opinion. Without some kind of exogenous shock, or in the absence of data that shows that the economy is significantly slowing, we expect that the Fed will be patient as it looks to ease restrictive policy. Although it is not our base case, we think that there is a reasonable chance that the Fed may not cut at all in 2024. We think that the most likely outcome is that the Fed will deliver one or two 25bp cuts in the second half of the year. The Fed faces a difficult conundrum –it cannot move too quickly in the face of a resilient U.S. economy that is still creating jobs; but the longer it keeps rates at elevated levels, the greater the probability that it tumbles the economy into some type of recession. We have a high degree of conviction that the Fed would very much like to decrease the policy rate as soon as it possibly can but we lack confidence that the data will allow them to do so. Therefore, we believe that a modest recession before the end of 2025 is more likely than not due to an extended version of “higher for longer” monetary policy.

Value of Active Management

We believe that a Fed that is biased toward decreasing its policy rate is a positive for our strategy. We are an intermediate manager with the bulk of our portfolio positioned in bonds that mature in 5 to 10 years. Our base case is the following scenario: The Federal Funds rate decreases over time while Treasuries that range in maturity from 2 to 5 years decrease in concert. At the same time intermediate Treasuries that mature in 5 to 10 years move back toward a normalized upward sloping level. This scenario would allow the yield curve to regain some of its classical steepness and CAM’s portfolio would benefit from the “roll-down” effect as bonds move down the yield curve, inching closer to maturity with each passing day.

The above chart goes back 20 years from the end of the first quarter of 2024. As you can see, the 5/10 Treasury curve is almost always positive and it has averaged 56.6bps of steepness over that time period relative to its closing level of -1bp at the end of March. If a 10-year bond is purchased with the intention of holding it for 5 years before selling, and the 5/10 Treasury curve averages 50bps over that period, the bond will yield 10bps of compensation annually in the form of roll-down. Curves are not static and in our opinion are best understood in terms of averages.

When discussing IG credit it is important to remember that there are two curves an investor should care about. There is the aforementioned Treasury curve and then there is the corporate credit curve that trades on top of Treasuries. This is the extra compensation that an investor receives for taking the additional credit risk of owning a corporate bond over a Treasury bond. Like Treasury curves, corporate credit curves are ever evolving and changing all of the time, thus they can present opportunity for the active investor. Unlike the Treasury curve, which can invert, the corporate credit curve is almost never inverted, though it can be inverted for specific bond issuers in spots from time to time due to credit conditions or technical factors. Active managers will eventually take advantage of these inversions until they no longer exist.

At the end of the first quarter the typical corporate credit curve for the A-rated companies that we are looking at for our portfolios ranged from 20 to 30 basis points with outliers on either side of that.^iv So if we pick a midpoint of 25bps then that means a 5-year bond of an issuer that trades at a spread of 50/5yr could expect to see the 10-year bond for that same issuer trade at a spread of 75/10yr. If a 10-year bond were purchased with the expectation of selling it at the 5-year mark, it would yield 5bps of roll-down credit spread compression for each year it is held. This is just the compensation afforded by the corporate credit curve. In normalized environments with an upward sloping Treasury curve, roll-down from the 5/10 TSY curve would provide additional benefits on top of compensation received from the credit curve. This one-two punch can amplify total returns, benefiting investors during periods of curve steepness.

As an active manager we are always looking for ways to maximize client positioning along the credit and Treasury curves. Sometimes this means we will favor shorter maturities within that 5-10yr band and other times we will be on the longer end of that range. In some environments, like the one we are in currently, the economics will dictate that we hold existing bonds longer, until they have 3 or 4 years left to maturity in order to maximize the effectiveness of a sale-extension trade. Although we sell 98%+ of our holdings prior to maturity, occasionally the bond math will indicate that we are better off holding a bond to maturity than we would be if we sold it and bought something else. As an active manager we are focused on the bond market all day every day constantly evaluating opportunities and looking to maximize the value of each individual client holding.

Creditworthiness: Strong to Quite Strong

We pride ourselves on our bottom up research process and believe it is one of the most important attributes that we bring to the table as a manager. We cannot control the direction of interest rates but we can exhibit a great deal of control over the credit worthiness of the bonds of the companies that we include in client portfolios. Investment grade companies are rated IG for a reason –yes, IG-rated companies do sometimes default on their debt obligations, but it is usually a multi-year process of credit degradation and a prudent manager will sell before the worst case of a default comes to fruition. In other words, when looking at investment grade credit, there are not many bad bonds, but there are a lot of bad prices. There are many bonds in the IG universe that are simply priced too rich and that do not offer adequate compensation per unit of risk. We always seek to populate client portfolios with bonds that are appropriately valued in an effort to reduce volatility and limit the prospect of spread widening during difficult market periods.

Although we are focused on individual credit analysis, looking at credit metrics for the IG-universe as a whole is instructive when we are trying to illustrate the current health of the overall market and it also helps us judge the relative value of investment opportunities. At the end of the 4^th quarter of 2023, credit metrics across IG were strong.^* EBITDA margins in particular continued to look impressive relative to history and are near all-time highs while EBITDA growth turned back to positive after a quarter of declines.

Net debt leverage for the non-financial IG index has been stable for 5 consecutive quarters and has improved since the first half of 2022. The only major credit metric that has declined in recent quarters is interest coverage and that is largely because companies have been issuing new debt with higher coupons than the debt that has been maturing.^v In the first quarter of 2024, the average coupon of IG new issues was 5.33% which was 202bp higher than the average coupon of maturing bonds which was 3.31%.^vi For context, compare that to 7.24% which was the average 30yr fixed mortgage rate for a residential buyer at the end of the first quarter: the cost of capital for IG-rated companies looks very reasonable.^vii Simply put, investors do not need to take a lot of credit risk or interest rate risk to generate healthy returns in IG-rated credit –aggregate credit metrics are at healthy levels and the index yield is >5%.

Looking Ahead

The last several years have been a historic time in the credit markets. From March 2020 until March 2022 we experienced arguably the easiest Fed policy in history with 0% Fed Funds accompanied with unprecedented economic stimulus. Then the Fed increased its policy rate 11 times in 18 months to its current range of 5.25%-5.5% –the fastest pace of tightening in over 40 years.^viii We are at the precipice of history once again as the Fed is tasked with finishing the war against inflation while restoring its policy rate to a more normative level. It is an environment of uncertainty –where will the economy go from here? We will continue to focus on our bread and butter and that is populating client portfolios with the bonds of companies that are well poised to navigate a variety of economic environments. We thank you for your interest and continued partnership as we navigate the balance of 2024.

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

ii Bloomberg WIRP, December 29 2023 “Fed Funds Futures”

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

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

v Barclays Bank PLC, March 13 2024 “US Investment Grade Credit Metrics, Q24 Update: No Concerns”

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

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

viii CNBC, December 13 2023 “The Federal Reserve’s period of rate hikes may be over. Here’s why consumers are still reeling”

06 Apr 2024

High Yield Quarterly, Insight CAM Team 0 comment

2024 Q1 High Yield Quarterly

In the first quarter of 2024, the Bloomberg US Corporate High Yield Index (“Index”) return was 1.47%, and the S&P 500 index return was 10.55% (including dividends reinvested). Over the period, while the 10 year Treasury yield increased 32 basis points, the Index option adjusted spread (“OAS”) tightened 24 basis points moving from 323 basis points to 299 basis points.

All ratings segments of the High Yield Market participated in the spread tightening as BB rated securities tightened 17 basis points, B rated securities tightened 44 basis points, and CCC rated securities tightened 59 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 409 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 Other Financial, Brokerage, and Energy sectors were the best performers during the quarter, posting returns of 2.79%, 2.58%, and 2.55%, respectively. On the other hand, Communications, Utilities, and Insurance were the worst performing sectors, posting returns of -1.90%, 0.29%, and 0.32%, respectively. At the industry level, retailers, paper, and healthcare all posted the best returns. The retailers industry posted the highest return of 4.89%. The lowest performing industries during the quarter were wireless, cable, and media. The wireless industry posted the lowest return of -7.12%.

The year is off to a very strong start in terms of issuance. The $92.7 billion figure is the most volume in a quarter since the third quarter of 2021. Of the issuance that did take place during Q1, Financials took 25% of the market share followed by Discretionary at 23% share and Energy at 15% share.

The Federal Reserve did hold the Target Rate steady at the January and March meetings. There was no meeting held in February. This made five consecutive meetings without a hike. The last hike was back in July of 2023. The Fed dot plot shows that Fed officials are forecasting 75 basis points in cuts during 2024. 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 67 basis points in cuts this year.ⁱ During the March post meeting press conference, Chair Powell “largely shrugged off recent data showing an uptick in inflation in recent months, saying, ‘It is still likely in most people’s view that we will achieve that confidence and there will be rate cuts.’ At the same time, he said the data supported the Fed’s cautious approach to the first rate cut, and added that policymakers are still looking for more evidence that inflation is headed toward their 2% goal.”ⁱⁱ The Fed’s main objective has been lowering inflation and while now being described as “bumpy,” it continues to trend in the desired direction. The most recent report for Core CPI showed a year over year growth rate of 3.8% down from a peak of 6.6% a year and a half ago. Further, the most recent Core PCE growth rate measured 2.8% off the peak of 5.6% from February of 2022.

Intermediate Treasuries increased 32 basis points over the quarter, as the 10-year Treasury yield was at 3.88% on December 31st, and 4.20% at the end of the first quarter. The 5-year Treasury increased 36 basis points over the quarter, moving from 3.85% on December 31st, to 4.21% at the end of the first 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 fourth quarter GDP print was 3.4% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2024 around 2.2% with inflation expectations around 2.9%.ⁱⁱⁱ

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 Q1, those elements were a drag on performance as lower rated securities outperformed and rate movements put our particular duration position at a disadvantage. Additional performance drag was due to our cash position and credit selections within the consumer and energy sectors. Benefiting our performance this quarter were our credit selections in the banking and technology sectors and our underweight in the communications sector.

The Bloomberg US Corporate High Yield Index ended the first quarter with a yield of 7.66%. 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 86 is well below the spike near 200 back during the March 2023 banking scare. Data available through February shows 5 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 2.53%.^iv The current default rate is relative to the 1.30%, 1.74%, 1.93%, 2.37% 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 $5.8 billion.^v 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 market backdrop was fairly positive for high yield this quarter. The nice inflows, strong issuance, and good available yield led to a positive total return. However, there are under-currents to monitor as consumer spending ticks up while the savings rate ticks down, and consumer delinquencies are moving higher across most loan categories. Looking ahead, the approaching presidential election certainly has the ability to impact markets, and the Fed stands at the ready to begin cutting rates. 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.

i Bloomberg March 29, 2024: World Interest Rate Probability

ii Bloomberg March 20, 2024: Fed Signals Three Rate Cuts Likely

iii Bloomberg March 29, 2024: Economic Forecasts (ECFC)

iv Moody’s March 14, 2024: February 2024 Default Report and data file

v CreditSights March 28, 2024: “Credit Flows”

05 Apr 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 toward the biggest weekly loss since mid-January on renewed concerns about the Federal Reserve delaying rate cuts and holdings interest rates higher for longer on robust economic data. The drop was also driven by rising commodity prices, led by oil and copper, fueling more inflation concerns, with the commodity index climbing for six consecutive sessions to close at a four-month high. Data during the week showed expansion in US manufacturing activity, a resilient labor market, and a relatively strong services sector.
The negative returns in the US high-yield market spanned across ratings. CCCs, the riskiest segment of the junk bond market, are expected to rack up the biggest weekly loss since early January.
Yields jumped 16 basis points so far this week to 7.82%, the biggest weekly increase in 11 weeks. Spreads widened 13 basis points week-to-date to close at 312
CCC yields climbed 26 basis points for the week so far to 12.13%, the largest in 13 weeks
Single B and BB yields rose by 16 and 13 basis points, respectively, to 7.54% and 6.62%
While worries about the Fed delaying easing interest-rates spurred losses across risk assets, the extent of these losses moderated a bit after Fed Chair Jerome Powell suggested that recent inflation readings, though higher than expected, didn’t “materially change” the overall picture. He also reiterated that it will likely be appropriate to begin lowering rates “at some point this year”

(Bloomberg) US Jobs Roar Again as Payrolls Jump 303,000, Unemployment Drops

US payrolls rose in March by the most in nearly a year and the unemployment rate dropped, pointing to a strong labor market that’s powering the economy.
Nonfarm payrolls advanced 303,000 last month following a combined 22,000 upward revision to job gains in the prior two months, a Bureau of Labor Statistics report showed Friday. The rise exceeded all expectations in a Bloomberg survey of economists.
The unemployment rate fell to 3.8%, with more people joining the workforce and able to find a job.
Job growth in March was led by faster hiring in health care, construction, as well as leisure and hospitality, which has now bounced back above its pre-pandemic level. A measure of the breadth of job gains increased.
“The US labor market appears to be strengthening, not slowing, and risks delaying Fed easing,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note.
The labor market has been the stalwart of the US economy, giving Americans the wherewithal to keep spending in the face of high prices and borrowing costs. While Fed officials have flagged moderation in job gains over the past year as a possible precursor to interest-rate cuts, Friday’s data may raise questions over the extent of that cooling and its implications for inflation.
An aggregate measure of weekly payrolls — which provides a broader reading of changes in earnings, hours and employment — rose 0.8%, matching the biggest monthly increase since January 2023.
Fed Chair Jerome Powell said Wednesday that labor supply and demand have come into better balance, nodding in part to more immigration. Policymakers have stressed they’re in no rush to lower borrowing costs and that incoming data will guide that decision.
Officials will see fresh figures on consumer and producer prices next week, followed by the March reading of their preferred inflation gauge — the personal consumption expenditures price index — before their April 30-May 1 meeting.
The jobs report is composed of two surveys: one of businesses that generates the payrolls and wage data, and another smaller one of households used to produce the unemployment rate.
The household survey also publishes its own measure of employment, which surged nearly a half million in March after declining in the prior three months. Many economists have discounted the recent weakness in this metric given that other indicators remain strong, such as unemployment claims and consumer spending.

22 Mar 2024

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

CAM Investment Grade Weekly Insights

Spreads stuck to a tight range this week and are looking to finish the period at the narrowest levels of 2024. The Bloomberg US Corporate Bond Index closed at 88 on Thursday March 21 after having closed the week prior at 89. The 10yr is trading at 4.22% this Friday morning after closing last week at 4.31%. Through Thursday, the Investment Grade Corporate Index YTD total return was -1.00%. The story remains the same: spreads are tight but yields are elevated. The yield to maturity for the Bloomberg US Corporate Bond index as of Thursday evening was 5.34%.

Economics

It was a light week for economic data but an extremely busy week for central banks throughout the globe. There were rate decisions from Australia, the BOJ, the BOE and of course the FOMC, among others. Chairman Powell walked a tightrope in his press conference and the market interpreted the Fed release as slightly dovish. The Fed made it clear that rate cuts are still on the agenda with its updated dot projections. The market is currently coalescing around 3 cuts for a total of 75bps beginning at the June meeting. This is far from certain in our view and only time (and ensuing economic data) will tell. As of this morning, interest rate futures are implying a 65% chance of a cut in June.

Issuance

Issuance was in-line with estimates on the week as companies priced more than $27bln of new debt. For the year, the torrid pace of issuance has now officially passed the half trillion mark, with 2024 setting a new record for how quickly $500bln was breached. Next week dealers are estimating $20bln of new supply. This number is certainly achievable, especially if Monday is busy, but we would not be surprised if the issuance tally is underwhelming relative to expectations. It is typically a seasonally slow week and the bond market closes early on Friday leaving Monday and Tuesday as the most favorable days for new issue prints.

Flows

According to LSEG Lipper, for the week ended March 20, investment-grade bond funds reported a net inflow of +$1.4bln. This was the 14^th consecutive weekly inflow for IG funds. YTD flows into IG stand at +$23.9bln.

22 Mar 2024

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bond rally came as a lagged response after Federal Reserve Chair Jerome Powell’s reiteration that rate cuts are likely to begin later this year. Yields plunged to a nearly 12-week low of 7.65%, after dropping for four straight sessions, and are on track for the biggest weekly decline in 10 weeks. Spreads tightened to a new two-year low of 292 basis points and are headed for third straight week of decline.
The broad junk bond gains were powered by expectations that the Fed will steer a soft landing after its officials’ median projection showed three quarter-point cuts in 2024.
The gains in the US junk bond market spanned across ratings. BB spreads, the most rate sensitive part of the high yield market, dropped to a new four-year low of 177 basis points. Yields closed at 6.47%, falling 19 basis points week-to-date, and are poised for the biggest weekly drop in almost 10 weeks
The index is headed to end the week with gains of 0.5%, rebounding from last week’s losses and spurred by the Fed’s reiteration that it was appropriate to slow the pace at which the central bank shrinks its balance sheet, suggesting further easing of its restrictive stance
BBs are poised to close the week with gains of 0.76%, the biggest since week ended Jan. 12, after notching the biggest returns in 11 weeks on Thursday
Single B yields tumbled to a fresh two-year low of 7.45% and have fallen 16 basis point this week, the biggest weekly decline in eight weeks. Spreads fell to 268 basis points, the lowest since 2007
CCC yields dropped back to below 12% and closed at 11.93%. Spreads closed at 718 basis points, tightening for the seventh straight week, the longest tightening streak since 2016
Borrowers and investors are still being drawn to the junk bond market amid steady yields and tightening spreads against the backdrop of a resilient economy and expectations of soft landing

(Bloomberg) Fed Signals Three Cuts Still Likely, Despite Inflation Uptick

Federal Reserve officials maintained their outlook for three interest-rate cuts this year and moved toward slowing the pace of reducing their bond holdings, suggesting they aren’t alarmed by a recent uptick in inflation.
Officials decided unanimously to leave the benchmark federal funds rate in a range of 5.25% to 5.5%, the highest since 2001, for a fifth straight meeting. Policymakers signaled they remain on track to cut rates this year for the first time since March 2020, but they now see just three reductions in 2025, down from four forecast in December, based on the median projection.
Chair Jerome Powell, speaking to reporters after the Fed’s decision Wednesday, demurred when asked whether officials would lower rates at their coming meetings in May or June, repeating that the first reduction would likely be “at some point this year.”
He largely shrugged off recent data showing an uptick in inflation in recent months, saying, “It is still likely in most people’s view that we will achieve that confidence and there will be rate cuts.”
At the same time, he said the data supported the Fed’s cautious approach to the first rate cut, and added that policymakers are still looking for more evidence that inflation is headed toward their 2% goal.
Inflation has eased “notably in the past year but remains above our longer-run goal of 2%,” Federal Reserve Chair Jerome Powell said to reporters in Washington.
Powell also said it would be appropriate to slow the pace of the Fed’s balance-sheet unwind “fairly soon,” after policymakers held a discussion on their asset portfolio this week.
“The decision to slow the pace of runoff does not mean our balance sheet will shrink, but allows us to approach that ultimate level more gradually,” he said. “In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility of money markets experiencing stress.”
The Fed’s post-meeting statement was nearly identical to January’s, maintaining the guidance that rate cuts won’t be appropriate until officials have more confidence inflation is moving sustainably toward their 2% target.

15 Mar 2024

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

The US junk bond rally finally broke on Thursday with the biggest one-day loss in four weeks driving the market to its first modest weekly loss since mid February. Data showed inflation continues to be sticky, even as retail sales showed some sluggishness signaling consumer spending may not hold as strong.
The prices paid to US producers rose the most in six months, pushed by higher fuel and food costs reinforcing broad concerns that the Federal Reserve may not be persuaded to ease its interest-rate policy anytime in the first half of the year.
While the market is pricing in fewer cuts and Treasury yields have increased markedly, it is a positive for credit, Barclays’ Brad Rogoff and Dominique Toublan wrote in a note Friday.
Junk bond yields have risen six basis points in the last four sessions to 7.78.
While yields were higher, though steady in the 7.70%-7.80% range, spreads dropped to 302 basis points, the lowest since January 2022, and a decline of 12 basis points since the beginning of the week.
Modest losses extended across ratings snapping the 15-day gaining streak in CCCs, the riskiest part of the high yield market. CCCs posted a loss of 0.21% on Thursday, the first in 16 sessions.
CCC yields rose to 12.01%, a five basis-point increase from last Friday, and the first weekly jump in four weeks.
CCCs, powered by the 15-day gaining streak, are headed to small gains for the week, bucking the broader trend. The week-to-date gains are 0.15%.
A resilient economy, a steady labor market and strong corporate balance sheets have drawn borrowers and investors into the market.
Steady yields and prices below par are inducing borrowers to take advantage of the market. The index price has hovered around $92-$93 this year.
Four deals for more than $2b priced on Thursday, pushing weekly issuance volume to $4.2b. The month-to-date supply stands at $11.8b.
Year-to-date supply is $69b.
The primary market is expected to stay busy in the next two weeks, though it may slow down ahead of the Fed meeting next week.

15 Mar 2024

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

CAM Investment Grade Weekly Insights

Spreads moved tighter throughout the week. The Bloomberg US Corporate Bond Index closed at 91 on Thursday March 15 after having closed the week prior at 95. The 10yr is trading at 4.31% this Friday morning after closing last week at 4.07%. Through Thursday, the Investment Grade Corporate Index YTD total return was -1.40%. Although spreads are near the tight end of their historical range, yields remain significantly higher than they have been in the recent past and meaningfully higher than they have been for most of the past two decades. The yield to maturity for the Bloomberg US Corporate Bond index as of Thursday evening was 5.4%, relative to its 10 and 20-year averages of 3.49% and 4.15%, respectively.

Economics

It was a mixed week for economic data but, overall, the economy remains resilient and the job market hasn’t yet lost its luster. On Tuesday, the core CPI gauge exceeded expectations for the second straight month. Headline CPI was up +3.2% year over year in February, slightly ahead of the +3.1% recorded for January. On Thursday, the data had something for both Hawks and Doves. PPI came in hot with pries paid during the month of February exceeding estimates while an employment report showed that fewer people were applying for jobless benefits. On the other side of the coin, tepid February retail sales data showed that consumer spending slowed relative to estimates. Market expectations have continued to shift –last week at this time interest rate futures were showing that investors were looking for 3 or 4 rate cuts in 2024 while this week the consensus has shifted more toward only 3 cuts. Next week is extremely light on the data front with the exception of the main event on Wednesday as all eyes will be on the FOMC rate decision. The Fed will also release its first update to the vaunted dot plot since December of 2023.

Issuance

In was another solid week of issuance as companies priced over $37bln of new debt, in line with sell side estimates. 2024 continues to be the busiest year in the history of the investment grade primary market with supply running at ~$476bln YTD, which is +36% higher than 2023’s pace. Next week is expected to see supply slow slightly with dealers estimating $25-$30bln of new supply.

Flows

According to LSEG Lipper, for the week ended March 13, investment-grade bond funds reported a net inflow of +$1.61bln. This was the thirteenth consecutive weekly inflow for IG funds. YTD flows into IG stand at +$22.5bln relative to +$13.1bln for the same period last year. Demand for IG credit has been strong as investors look to lock-in yields ahead of potential Fed rate-cuts.

08 Mar 2024

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

CAM Investment Grade Weekly Insights

Spreads were relatively unchanged during the week as the index sat 7bps off its tightest levels of the year through Thursday’s close. The Bloomberg US Corporate Bond Index closed at 96 on Thursday March 8 after having closed the week prior at 97. The 10yr is trading at 4.07% this Friday morning after closing last week at 4.18%. Through Thursday, the Investment Grade Corporate Index YTD total return was -0.54%.

Economics

The two highlights of the week were Jay Powell’s testimony to Congress on Wednesday morning and the nonfarm payrolls report on Friday. Chairman Powell stayed on message while addressing lawmakers. He continued to emphasize the Fed’s commitment to data dependency while indicating it is likely that the FOMC will begin to cut rates in 2024. The jobs number on Friday was the type of print that had something for both the “cut now camp” and the “no cuts in 2024 camp.” The report showed that the U.S. unemployment rate climbed to a two year high for the month of February while wage growth slowed. Still, payrolls continued to grow at a healthy rate and the unemployment rate remains quite low by historical standards. Post jobs report, interest rate futures were fully pricing in a 25bp rate cut in June and a total of 100bps by the end of 2024.

Issuance

In what seems to be a recurring theme, it was another banner week for issuance as more than $50bln of new debt priced for the third consecutive week. 2024 continues to be the busiest year in the history of the investment grade primary market with supply running at ~$440bln YTD, which is +30% YoY. Next week is expected to feature brisk activity as well with estimates looking for $30-$35bln of new debt.

Flows

According to LSEG Lipper, for the week ended March 6, investment-grade bond funds reported a net inflow of +$4.5bln. This was the twelfth consecutive weekly inflow for IG funds and the largest inflow in over a year.

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