Category: Investment Grade Weekly

Spreads are set to finish the week wider to the tune of 1-2 basis points.  The OAS on the Bloomberg Barclays Corporate Index closed Thursday August 5 at a spread of 88 after having closed the week prior at 86.  We are going to print amid a positive market tone on this Friday morning after a strong unemployment report.  The yield on the 10yr Treasury traded higher this week but most of that move occurred this morning after the aforementioned employment report.  The 10yr closed last week at 1.22% and is trading at 1.28% at the moment.   Through Thursday, the Corporate Index had posted a year-to-date total return of +0.08% and an excess return over the same time period of +1.54%.

It was the busiest week for the new issue market in over 2 months according to Bloomberg, as weekly volume eclipsed $32bln.  Next week should also see brisk issuance before things slow down at the end of August for the last salvo of summer vacations. According to data compiled by Bloomberg, $909bln of new debt has been issued year-to-date.

We have seen more of a two-way flow in the market the past several weeks.  The reopening trade has lost some steam as investors weigh the risks of the delta variant.  For most of 2021, credits levered to reopening were in the midst of a one-way trade to tighter spreads and lower yields but those credits have seen mixed and in some cases poor performance in recent trading sessions.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of July 29–August 4 were +$5.7bln which brings the year-to-date total to +$247bln.

Spreads continued to trade sideways this week, having exhibited little change, though the index itself did hit a new mark for its tightest level of the year when it closed Wednesday at a spread of 80.  The OAS on the Blomberg Barclays Corporate Index closed Thursday July 1 at a spread of 81 after having closed at the same level the week prior.  The 10yr Treasury traded slightly lower throughout the week and a payroll report on Friday that modestly beat expectations did nothing to change the direction of that trade.   Through Thursday, the Corporate Index had posted a year-to-date total return of -1.34% and an excess return over the same time period of +1.97%.

New issuance volume was light during the week which was expected given the timing of quarter end and the 4^th of July holiday.  $11.9bln of new debt was priced during the week, with the bulk of that consisting of an outsize $8bln print by Salesforce.  According to data compiled by Bloomberg, $790bln of new debt has been issued year-to-date.   Consensus estimates are looking for $15-20bln of issuance next week, which will consist of only 4 trading days.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of June 24–30 were +$3.5bln which brings the year-to-date total to +$208bln.

Have a safe and enjoyable 4^th of July.

Spreads touched their narrowest levels of the year this week but are slightly wider off those tights as we go to print this Friday morning.  The OAS on the Blomberg Barclays Corporate Index closed Thursday at 82, after closing the previous week at 84.  Spreads have traded in a 5 basis point range over the course of the past four weeks.  The FOMC took center stage with its meeting and commentary on Wednesday, and while most investors would agree that the Fed was more hawkish this week than it has been recently, it had little effect on Treasuries, with the biggest story being lower rates on the long end and flatter curves.  The 10yr Treasury remains wrapped around 1.46%, nearly 30 basis points lower than the highs we saw at the end of March.   Through Thursday, the Corporate Index had posted a year-to-date total return of -1.74% and an excess return over the same time period of +1.88%.

The amount of new issuance in recent weeks has been solid by historical standards but demand has been strong and frankly the market could use some more issuance to restore some two-way flow to its price action.  $22bln of new debt priced during the week  according to data compiled by Bloomberg and more than  $757bln of new debt has been issued year-to-date.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of June 10–16 were +$10bln which brings the year-to-date total to +$203bln.  According to Wells data compilation, this was the largest inflow into IG funds since September.

Spreads barely budged during the week.  The OAS on the Blomberg Barclays Corporate Index closed Thursday at 88, which was unchanged from the week prior.  Spreads remain near their tightest levels of the year across the board.  The biggest surprise this week was the payroll data that was released this Friday morning.  According to Bloomberg, the April employment report was the biggest disappointment on record in terms of downside with only 266,000 jobs created versus the consensus forecast for a 1 million job increase.  The initial reaction sent the 10yr Treasury 10 basis points lower, but those gains were quickly pared sending rates back closer to unchanged levels as we head into the Friday close.  Interestingly enough, past experience has shown that a payroll miss often leads to lower equities but stocks are higher as we go to print, with the prevailing thought that a protracted recovery will lead to continued Fed accommodation which investors read as bullish for risk assets.   Through Thursday, the corporate index had posted a year-to-date total return of -3.10% and an excess return over the same time period of +1.17%.

Issuance is starting to pick up as companies work through earnings and $25bln in new debt was priced during the week.  This was a bit of a light start given the high expectations for May, with consensus estimates looking for $150bln by month end.  Strong investor demand has led to narrow concessions across the board.  According to data compiled by Bloomberg, $573bln of new debt has been issued year-to-date.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of April 29-May 5 were +$7.2bln which brings the year-to-date total to +$149bln.

Spreads inched marginally tighter throughout the week.  The OAS on the Blomberg Barclays Corporate Index closed Thursday at 88 after closing the week prior at 90.  Spreads are near their tightest levels of the year across the board.  First quarter earnings season is in full swing now and Thursday was the busiest day yet, with 11% of the S&P 500 having reported on Thursday.  Earnings and economic data have been solid with 86% of S&P 500 companies that have reported so far beating estimates, according to data from Refinitiv. Treasury yields are slightly higher so far this week to the tune of 1-2 basis points.  Through Thursday, the corporate index had posted a year-to-date total return of -3.70% and an excess return over the same time period of +1.05%.

It was a muted week for the new issue market which is to be expected during the midst of earnings season.  Borrowers brought just $12.9bln of new debt during the week and $111 billion for the month of April.  The pipeline for issuance is building, however, and the consensus estimate for May issuance is $150 billion. According to data compiled by Bloomberg, $548bln of new debt has been issued year-to-date.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of April 22-28 were +$5.4bln which brings the year-to-date total to +$142.5bln.

Spreads exhibited little movement this week and the spread on the index looks likely to finish unchanged after it is all said and done.  The OAS on the Blomberg Barclays Corporate Index closed Thursday at 89 after closing the week prior at 89.  Spreads are very near their year-to-date tights across the board.  Treasury yields moved lower throughout the week before drifting higher on Friday.  As we go to print on Friday, the 10yr Treasury is almost 10 basis points lower from quarter end when it closed at 1.74%.  Through Thursday, the corporate index had posted a year-to-date total return of -3.77% and an excess return over the same time period of +1.07%.

Primary market issuance was subdued this week, which is customary in the days following quarter end.  Borrowers brought just $17.6bln of new debt.  According to data compiled by Bloomberg, $455bln of new debt has been issued year-to-date, with a pace of -22% relative to last year.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of April 1-7 were +$5.3bln which brings the year-to-date total to +$112.8bln.

Spreads regained some ground this week and are looking to finish several basis points tighter.  The OAS on the Blomberg Barclays Corporate Index closed Thursday at 96 after closing the week prior at 98.  Treasuries were unusually volatile again, with the 10yr having a range of over 10 basis points during the week.  The FOMC played a large part in driving news flow during the week with a rate decision on Wednesday and an announcement on Friday that they would allow some bank regulatory exemptions to expire at month end.  On Wednesday, Chairman Powell repeated promises to hold the Fed Funds rate at a low level in an effort to keep the economic recovery moving in the right direction.  Additionally the Fed indicated that it would not budge if inflation breached its 2% target during the year, saying it would view pockets of rising prices as transitory in nature.  The 10yr Treasury is wrapped around 1.7% as we go to print on Friday afternoon, which is near the highest level of the year.  Through Thursday, the corporate index had posted a year-to-date total return of -5.47% and an excess return over the same time period of +0.35%.

Issuance was strong again this week and will total about $30bln when it is all said and done.  Not even the opening day of the NCAA Basketball Tournament could stop things, as a couple of issuers are bringing new deals on Friday.  According to data compiled by Bloomberg, $383bln of new debt has been issued year-to-date, with a pace of +35% relative to last year.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of March 11-17 were +$3.6bln which brings the year-to-date total to +$103bln.

Spreads will finish the week comfortably wide of the year-to-date tights that we saw 2 weeks ago.  It was a volatile week for rates and spreads and the OAS on the Bloomberg Barclays Corporate Index closed at 92 on Thursday evening after ending the week prior at 90.  Treasuries were relatively calm the first two days of the week before inching higher throughout mid-week as Fed Chairman Powell delivered some dovish remarks on Thursday afternoon.  The 10yr Treasury, which traded as low as 1.39% on Monday, had risen to 1.57% into the Thursday close.  Friday morning saw the release of an employment report that topped expectations, sending the 10yr even higher, up to 1.62%, but the sell off in rates quickly faded and most of Friday afternoon was been spent wrapped around 1.55%. Through Thursday, the corporate index had posted a year-to-date total return of -4.21% and an excess return over the same time period of +0.50%.

The high grade primary market had a huge week as 45 issuers defied volatility bringing more than $65bln in new debt.  Next week also looks like it could be a big number as inflows into the investment grade market have created good demand and issuers have been happy to oblige.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of February 25-March 3 were +$4.9bln which brings the year-to-date total to +$82bln.

As we move forward, it is now all quiet on the Fed front as the blackout period on public comment is now in effect.  The Fed meets March 16-17 so the market will have an interesting test over the next 2 weeks as it must interpret data on its own as opposed to parsing Fed-speak.

Spreads continued their slow burn this week, gradually inching tighter.  The OAS on the Bloomberg Barclays Corporate Index closed at 88 on Thursday evening after ending the week prior at 92.  Treasuries are at their highest levels of the year for the second consecutive week.  The 10yr Treasury closed last week at 1.21% and it is trading at 1.35% as we go to print this Friday afternoon.  Through Thursday, the corporate index had posted a year-to-date total return of -2.07% and an excess return over the same time period of +0.83%.

The high grade primary market was light during the holiday shortened week with only $14bln in new issuance.  Concensus estimates for next week are calling for $30-$40bln in new issuance, according to Bloomberg surveillance.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of February 11-17 were +$7.6bln which brings the year-to-date total to +$73bln.

Price action in Treasuries the past two weeks has been wrapped around investor views of stimulus and inflation.  As vaccinations increase and infections decrease, global economies can be expected to exit their slumber.  We think there is a consensus among market participants that inflation is likely to increase throughout 2021 and into 2022 but we are of the view that there is much uncertainty regarding the degree of the relfation trade.  There are numerous areas of the economy that could take years to recover while there are some sectors that have already recovered and those that will bounce back even stronger.  Are sustainable broad based price increases across the vast majority of the economy possible?  Anything is possible, but we would argue that an extraordinarily robust recovery over a short time period is unlikely – but let’s assume this does come to fruition.  While the Fed has said it would tolerate temporary inflation above its targeted level, if it were to view this as something more than fleeting, and if it were to view the economy as “overheating” then it could well accelerate the timeline for raising the Fed Funds Rate.  A higher Fed Funds Rate typically leads to tighter financial conditions and slowing growth, which would put a brake on any reflation trade.  The point is that yes, we think reflation is likely, especially in certain sectors of the economy.  But even if the domestic economy were to recover much more quickly than expected, we are skeptical that the Fed will allow significant levels of inflation without Fed Policy intervention.

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.

Spreads initially ripped tighter on Monday of this week before giving back some gains, but it looks like the index will still end the week tighter, or at worst, unchanged.  The OAS on the Bloomberg Barclays Corporate Index closed at 92 on Thursday evening after ending the week prior at 93.  Treasuries are at their highest levels of the year across the board and curves continue to steepen.  The 10yr Treasury closed last week at 1.16% and it is hovering around 1.19% as we go to print on this Friday morning.  Through Thursday, the corporate index had posted a year-to-date total return of -1.45% and an excess return over the same time period of +0.49%.

The high grade primary market was more subdued this week with only $16bln in new issuance.  Next week, too, may see lower volumes with the market closed for Presidents Day on Monday, but midway through February we are on pace for $120bln of issuance which is quite a strong number.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of February 4-10 were +$2.1bln which brings the year-to-date total to +$40bln.

In our recent discussions with some of our clients, the topic of inflation and rising rates has been coming up with increasing frequency.  We have long warned of the folly of trying to predict moves in interest rates.  That is one of the reasons that we always position our portfolio in intermediate maturities rather than attempting to tactically switch between long and short maturities based on our guess as to the direction of rates.  To put recent rate moves into context, the 10yr Treasury closed at 0.51% on August 4, 2020 and it has more than doubled since then, closing at 1.18% on February 11, 2021.  If we look at returns for the Corporate Index over this same time frame you may be surprised to learn that the total return for the index was only modestly negative at -0.38% total return; and you would be hard pressed to cherry pick a worse timeframe for returns from a rate presepective!  The reason that corporate credit returns can be relatively resilient in the face of rising rates is due to the power of spread compression and coupon income.  Over that same period the index saw its spread compress from 131 to 92 and then investors also earned a coupon from corporate credit that was greater than the coupon earned from investing in duration matched Treasuries.  Could rates continue to go higher from here?  Yes of course they could, just as they could go lower.  But we would be surprised to see them go materially higher in the near term as our expectations for inflation remain relatively subdued relative to what seems to be a growing market concensus.  We will explore some of the reasons why inflation is not necessarily something investors should bank on in our future weekly commentaries.  Thank you for your interest and continued support.