Category: Investment Grade Weekly

Credit spreads moved tighter again this week and are now trading at the narrowest levels that they have seen in years.  The Bloomberg US Corporate Bond Index closed at 79 on Thursday October 17 after closing the week prior at 81.  The 10yr Treasury yield was less than a full basis point lower week over week through Thursday, trading at 4.09% into the close. Through Thursday, the corporate bond index year-to-date total return was +4.10%.

Spreads are Tight, and for Good Reason

It has become a common refrain among some investors who are quick to shout from the rooftops about how tight credit spreads are, especially as spreads have been grinding lower for the past month.  The index is 22bps tighter since September 11 and the spread on the Corporate Index is at its lowest level since 2005.  First, we would remind investors that tight spreads are not limited to investment grade and that they are tight across the entire fixed income universe.  And why shouldn’t spreads be tight?  Stocks are at or near all-time highs.  The economy continues to hum along and a “soft landing” or “no landing” has become increasingly likely.  Most especially, if the economy takes a turn for the worse, the vast majority of investment grade rated companies are in little danger of delivering any type of permanent impairment to their bondholders.  This is not true in other sectors of the bond market like leveraged loans, junk bonds or private credit, all of which carry appreciably more credit risk for investors than the investment grade market.

Aside from a strong fundamental backdrop, there are also numerous technical factors that have been supportive of spreads.

• The permanence of the foreign bid. Foreign investors are among the largest holders of US corporate bonds and while they haven’t been huge buyers in 2024, they also haven’t been sellers and have still been adding to positions at the margin.
• Fund flows into the IG asset class have been roundly positive by all measurable sources. One source of fund flows that we track has shown positive inflows into IG funds in 36 of 42 weeks thus far in 2024.
• Life and P&C insurance companies have been strong buyers of IG credit on the entire curve throughout 2024. Have you looked at your insurance bill lately?  Premiums are up sharply in recent years and insurance companies invest the majority of these funds into investment grade fixed income in order to pay future claims.
• Pensions need to be rebalanced and many are fully funded. With equity markets having posted strong returns in recent years pensions must divert more funds to their fixed income allocations in order to balance their overall portfolios.  Also, there are many more pensions that are fully funded today relative to where they have been in the recent past –this leads the pension manager to take less risk, favoring asset classes like IG credit.
• Lack of new issue supply in the final 10 weeks of the year could drive secondary spreads even tighter. It is well understood how strong corporate IG issuance has been thus far in 2024 but one of the reasons for this is the aforementioned demand factors.  It seems unlikely that issuance can sustain its torrid pace through year end and if in fact it does slow then this could be another technical that could drive spreads tighter.

Finally, the main reason that spreads are as tight is a rather simplistic one: it’s all about yield.  Many investors in the IG market are agnostic to the overall level of spreads and care much more about yield.  These investors use IG credit to solve a problem.  For example, they may have a liability coming due in 10yrs and they need a 5% annual return in a high-quality investment –there are many IG bonds that would satisfy that requirement.  Credit spread is simply a component of your overall yield when you invest in a corporate bond.  We have highlighted this throughout the year: the yield to maturity for the IG corporate bond index was 4.94% on Thursday afternoon.  The average YTM for the index the past 10yrs was 3.63%.  If you go back 20yrs that number was 4.16%.  Each investor has their own suitability requirements but we think IG credit at ~5% is undeniably attractive, especially considering how infrequently this type of compensation has been available in recent years.

Issuance

It was a solid week for issuance during the holiday shortened week as companies priced $25.8bln of new debt. However, this fell short of the top end of estimates that were looking for as much as $30bln.  Financial firms accounted for 100% of issuance this week which was widely expected by investors with banks hungry to issue debt on the back of earnings.  Many of the banks printed strong quarterly earnings reports which led to enthusiastic investor demand for their new debt.  We continue to expect issuance to slow over the next 17 days as the election draws nearer but syndicate desks are still looking for a respectable $20bln of issuance in the week to follow.

Flows

According to LSEG Lipper, for the week ended October 16, investment-grade bond funds reported a net inflow of +$2.17bln.  This was the 12^th consecutive week where the asset class reported an inflow.  Total year-to-date flows into investment grade funds were +$62.7bln.

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.

Credit spreads inched tighter this week, breaching a new year-to-date low.  The Bloomberg US Corporate Bond Index closed at 81 on Thursday October 10 after closing the week prior at 83.  The 10yr Treasury yield was 9 basis points higher this week through Thursday, moving from 3.97% to 4.06%. Through Thursday, the corporate bond index year-to-date total return was +3.97%.

Economics

The highlights this week were led by CPI and PPI on Thursday and Friday, respectively.  CPI came in a smidge hotter than expectations but it was not enough to meaningfully alter the outlook with regard to inflation and there was no real discernable impact to equities, credit or rates.  The PPI data set was relatively tame and best described as in-line with expectations.

Next week is a light one from a data perspective with the only meaningful print occurring next Thursday morning with retail sales.

Issuance

It was a solid week for issuance as companies priced $16.1bln of new debt, besting the top end of the estimated range ($15bln).  Bank earnings season is underway as of Friday and the big-six money center banks are expected to dabble in the primary market next week creating a wide range of estimates with dealers looking for $10-$30bln of new supply.  Next week is a holiday shortened one with the market closed on Monday for Columbus Day.  As the calendar rolls into the second half of October it would not surprise us if the new issue market took a breather heading into election season.

Flows

According to LSEG Lipper, for the week ended October 9, investment-grade bond funds reported a net inflow of +$1.83bln.  This was the 11^th consecutive week where the asset class reported an inflow.  Total year-to-date flows into investment grade funds were +$60.5bln.

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.

Credit spreads traded within a narrow window this week and are 1 basis point better week over week.  The Bloomberg US Corporate Bond Index closed at 90 on Thursday September 26 after closing the week prior at 91.  The 10yr Treasury yield was higher this week through Thursday, up 5.5 basis points from where it closed last Friday. Through Thursday, the corporate bond index year-to-date total return was +5.22%.

Economics

There were some data points during the week to highlight.  One of the most interesting under the radar prints was consumer confidence on Tuesday morning which fell the most in three years from the prior month’s reading.  A closer look at the data showed that consumers were hesitant to spend with a labor market that has been showing signs of slowing amid persistently high costs of living.  On Thursday there was a GDP release that showed that figure coming in at +3% for the second quarter.  This was slightly better than the consensus estimate and economists are looking for an expansion of +2% in the third quarter.  So, while GDP may be slowing, it is expected to remain in positive territory.  The most anticipated release of the week was PCE and spending data on Friday morning.  The Fed’s preferred inflation gauge and spending both rose at very modest levels which is likely to keep the Fed on track for another cut at its November 7^th meeting, although there is still plenty of data that could sway them between now and then.  Recall that there is no meeting in the month of October.

Next week is very similar to this week in that there are some meaningful data points but we will again have to wait until Friday for the main event which is the September payroll release.

Issuance

It was déjà vu all over again as issuance this week once again exceeded expectations.  Companies brought $37bln of new bonds to market relative to the high end of estimates at $25bln.  This capped off the busiest September on record at $168bln of monthly supply.  The previous high-water mark was $164bln amid the pandemic borrowing binge of September 2020.  Interestingly, according to sources compiled by Bloomberg, this was the fourth month this year where a record for monthly issuance volume was broken.  The previous record setting months were January, February and July.  More than 1.261 trillion of new debt has been priced in 2024 putting it a whopping +29% ahead of 2023’s pace.  As we have written in previous commentaries it is somewhat of a goldilocks scenario for both borrowers and lenders (bond sellers and bond buyers) in that the prices paid are attractive for both parties.  Absent any meaningful move in either direction for rates and/or spread we would expect this type of environment to persist although we could see a slowdown ahead of the November 5^th presidential election.

Flows

According to LSEG Lipper, for the week ended September 25, investment-grade bond funds reported a net inflow of +$1.34bln.  Short and intermediate investment-grade bond funds have seen positive flows 33 of the past 39 weeks.  The total year-to-date flows into investment grade funds are +$55.1bln.

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.

Credit spreads moved meaningfully tighter this week with the index trading at its richest level since late July.  The Bloomberg US Corporate Bond Index closed at 91 on Thursday September 19 after closing the week prior at 96.  The 10yr Treasury yield drifted higher throughout the week, up 6 basis points from where it closed last Friday.  The entire Treasury curve continued to steepen on the back of Wednesday’s policy rate cut by the FOMC.  Through Thursday, the corporate bond index year-to-date total return was +5.58%.

Economics

The long awaited FOMC rate cut finally came to fruition this week.  The Fed elected to kick things off with a 50bp cut.  We would not call this a surprise, per se, but 25bps was what the market was looking for up until the middle of last week when the odds (Fed Funds futures) started to show an increasing likelihood of 50bps.  The Summary of Economic Projections (SEP or Dot Plot) that was released at this meeting showed that a majority of FOMC members believe that there will be 50bps of additional cuts in 2024 and 100bps of cuts in 2025.  The Fed does not meet in October so market prognosticators have extrapolated a 25bp cut at each of the November and December meetings.  By all accounts it appears that the Fed was close to delivering a 25bp cut at its July meeting (there was no August meeting) and employment revisions and economic data since that time led them to “catch up” to the fact that they did not cut earlier by kicking things off with 50bps instead of 25bps.  Remember that the September SEP is merely a forecast and does not necessarily reflect what will actually occur in the future.  The SEP is only updated once every three months and simply reflects the median view of the FOMC members at a given point in time.  That being said, 50bps of cuts in ’24 with an additional 100bps in ’25 sounds right to us given what we know today and what has been a resilient economy.  We would also expect that at some point in 2025 the Fed may elect to end its balance sheet reduction (aka QT or quantitative tightening).  The Fed kept its current plan in place for the time being where it will continue to allow $60bln of its balance sheet reduce each month.  The current cycle of QT has reduced the Fed’s balance sheet from a peak of $9bln in mid-2022 to just above $7bln today, which is still elevated relative to pre-pandemic levels.  The Fed’s balance sheet prior to March 2020 was just ~$4.25bln and prior to the 2008 financial crisis it was zero!

Next week is reasonably busy from an economic data standpoint.  The highlights include consumer confidence, new home sales, GDP and the main event next Friday morning with core PCE.

Issuance

Issuance was light this week and underwhelmed relative to expectations as just $12.4bln of new debt was sold relative to the forecast of $25bln.  In our view this “miss” can be explained by the mid-week Fed meeting and pull forward of issuance earlier this month as borrowers took advantage of a red-hot primary market in the days immediately following Labor Day.  Dealers are calling for $20-$25bln of issuance next week.  Over $131bln of debt has been priced so far in the month of September 2024.  The five-year average for September is $136bln with the busiest year being 2020 when $164bln priced during the month.

Flows

According to LSEG Lipper, for the week ended September 18, investment-grade bond funds reported a net inflow of +$1.86bln.  Short and intermediate investment-grade bond funds have seen positive flows 32 of the past 38 weeks.  The total year-to-date flows into investment grade funds are +$53.8bln.

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.

Credit spreads did not change much this week though the index may finish the period a basis point tighter if the current trend holds through the end of the day on Friday.  The Bloomberg US Corporate Bond Index closed at 92 on Thursday September 5 after closing the week prior at 93.  The 10yr Treasury yield traded lower throughout the week, down 17 basis points from last week through Thursday’s close.  The 2/10 Treasury curve closed with a positive slope on Wednesday evening for the first time since July 1 2022, snapping the longest streak on record for a 2/10s curve inversion.  Through Thursday, the corporate bond index year-to-date total return was +4.71%.

Economics

The biggest data release during this holiday shortened week was Friday’s job report which came up slightly short of expectations keeping the FOMC on schedule to deliver the first policy rate cut on September 18.  There are some meaningful prints next week with CPI, PPI and consumer sentiment data, but today’s employment report was the last large hurdle to clear to ensure a rate cut, in our view.  Now it just comes down to a matter of whether the Fed will deliver 25 or 50 basis points with its first ease of the cycle.  As we go to print Friday morning traders are split on the magnitude of a cut with Fed Funds Futures pricing a 100% chance of at least a 25bp cut and a 40% chance of a 50bp cut.

Issuance

Issuance was the big story of the week as US investment grade bond sales topped $80bln capping the fifth busiest week on record according to Bloomberg.  The wild week that was featured a record breaking 29 borrowers tapping the market on Tuesday for a total of $43.3bln.  Volume-wise Monday was the third busiest day on record.  With $80bln of issuance in the first four trading days of the month it seems that we are well on our way to hitting the $125bln September estimate that dealers were looking for at the end of August.  Next week syndicate desks are projecting $30-$35bln of issuance though we would not be surprised if one or two larger deals could push that total higher.  Year-to-date issuance now stands $1.174 trillion which is +29% ahead of last year at this point in time, and 2023 was not a light year by any means.

Some readers may be wondering why issuance has been so robust this year even as we are on the precipice of a Fed easing cycle.  There are a few reasons why the environment for IG issuance has been so strong.  First, fund flows into the IG asset class have been solid thus far in 2024 which means a variety of investors have money to put to work.  However, a large portion of IG investors (~70%) are institutional in nature and are not necessarily reliant on these flows.  These are life insurance companies, property casualty insurance companies, pensions, banks and foreign institutional investors.  These investors often have long term liabilities that they need to match against an income stream (asset liability matching) and high-quality investment grade bonds are a very good vehicle to help them accomplish these goals.  There are also scores of investors in the IG market with long time horizons such as pensions and endowments.  These investors always have funds to invest and this has been magnified by rebalancing.  Due to the strong performance of equities the past few years these accounts have been allocating even more funds to IG credit as some of those equity gains find their way into corporate bonds.  With real and nominal yields at elevated levels relative to the recent past institutional investors of all types have been very active buyers of IG credit and this is a trend that has been in place for the past 18 months.  In recent months we have started to see increased interest from retail investors in the form of SMA/mutual fund/etf which is more reflected in fund flows and creates some additional demand for IG issuance.  We believe this interest will only continue to increase as the Fed cuts its policy rate which will in turn lower the interest rate for money market accounts, high yield savings and other cash alternatives.

From the perspective of companies, a popular misconception is that they should wait for the Fed to cut before they borrow.  This may be true at the very front end of the Treasury curve but when the Fed cuts its policy rate it typically has little effect on the 10yr or 30yr Treasury. The trading levels of these longer maturities are more reflective of investor expectations for inflation and economic growth.  Many companies, especially large investment grade rated companies, are doing quite well operationally.  Margins are at or near their peak for some companies and many companies are still increasing profit margins.  Companies are no longer getting the free lunch they were getting back when they were borrowing in the low-rate era but their business models can easily support long term funding in the 4-6% range so they are not letting that level of interest expense interfere with their long-term plans for growth, expansion or M&A.  This has made for an environment where investors are happy to lend at what they view as attractive interest rates and borrowers are happy to lock in funding at levels where the math still works for their business plans.  The current environment for investment grade is about as close as you can get to a win-win for both investors and borrowers.

Flows

According to LSEG Lipper, for the week ended September 4, investment-grade bond funds reported a net inflow of +$3.3bln.  Short and intermediate investment-grade bond funds have seen positive flows 30 of the past 36 weeks.  The total year-to-date flows into investment grade funds are +$50.1bln.

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.

Credit spreads exhibited little change during the week before Labor Day.  The Bloomberg US Corporate Bond Index closed at 94 on Thursday August 29 after closing the week prior at the same level.  The 10yr Treasury yield was slightly higher throughout this week, up 6 basis points from last week through Thursday’s close.  Through Thursday, the corporate bond index year to date total return was +3.77%.

Economics

There were several big data releases this week but all were within the realm of expectations.  Durable goods orders surprised to the upside on Monday but it was driven almost entirely by aircraft which can be volatile.  GDP too came in slightly higher than expectations amid resilient consumer spending.  Finally, on Friday morning we got the Fed’s preferred inflation gauge.  It was a relatively good print for PCE that along with revisions showed that moderating inflation is trending in the right direction, inching closer to the Fed’s 2% target.  Next week has some reasonably meaningful economic releases including the employment report on Friday which is the last big data point ahead of the next FOMC meeting on September 18.

Issuance

Companies priced just $2.05bln of new debt this week across a handful of small deals.  Syndicate desks are predicting $125bln of new issue volume for the month of September.  In 2023, borrowers priced $55bln during the first week of September and 2024’s haul could be similar, with a flurry of activity expected right out of the gate.  The year-to-date issuance total now stands at $1.094 trillion.

Flows

According to LSEG Lipper, for the week ended August 28, investment-grade bond funds reported a net inflow of +$1.76bln.  Short and intermediate investment-grade bond funds have seen positive flows 29 of the past 35 weeks.  The total year-to-date flows into investment grade funds are +$46.81bln.

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.

Credit spreads drifted sideways this week and are looking to finish the period just slightly tighter.  The Bloomberg US Corporate Bond Index closed at 95 on Thursday August 22 after closing the week prior at 96.  The 10yr Treasury yield was little changed from the week prior, less than 3 basis points lower week over week through Thursday.  Through Thursday, the corporate bond index year to date total return was +3.63%.

Economics

It was a light week for economic releases.  There was a BLS payrolls revision on Wednesday that showed that job growth over most of the past year was lighter than expected but this was not a market moving event.  FOMC meeting minutes, jobless claims that were mostly inline and a S&P PMI print that beat expectations rounded things out but none were particularly meaningful for market direction.  As we go to print this Friday morning, Jerome Powell is just beginning to deliver his policy speech at the Jackson Hole Economic Symposium and his prepared remarks indicate that the Fed is nearly ready to begin cutting its policy rate.  Next week things ramp up with durable goods on Monday, GDP on Wednesday and income/spending data along with PCE data on Friday.

Issuance

It was a strong week for issuance considering that the second half of August is typically seasonally slow.  Investment grade companies priced nearly $23bln of new debt with Kroger leading the way as it priced a $10.5bln seven-part jumbo deal to prefund a portion of the cash component for its potential acquisition of Albertsons.  Next week syndicate desks are looking for less than $5bln of new debt and $0 is a real possibility as the week before Labor Day is nearly always one of the quietest of the year for the primary market.  The year-to-date issuance total now stands at $1.091trln, +27% ahead of 2023’s pace.

Flows

According to LSEG Lipper, for the week ended August 21, investment-grade bond funds reported a net outflow of -$0.345bln.  Short and intermediate investment-grade bond funds have seen positive flows 28 of the past 34 weeks.  YTD flows into IG stand at +$45.05bln.

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.

Credit spreads initially moved wider this week on Monday before snapping tighter throughout the rest of the period.  The Bloomberg US Corporate Bond Index closed at 96 on Thursday August 15 after closing the week prior at 102.  The 10yr Treasury yield experienced some meaningful intraday moves throughout the week but was little changed from the week prior, only 3 basis points lower through Thursday.  Through Thursday, the corporate bond index year to date total return was +3.11%.

Economics

There was plenty of action this week with a bevy of economic releases.  PPI on Tuesday and CPI on Wednesday both came in slightly below estimates, indicating that slowing inflation has maintained its momentum.  On Thursday morning, retail sales data for July came in much better than expected, although the control group posted just a modest gain that showed deceleration in control group spending from June to July.  Still, there was little in the retail sales print that indicated that the economy was anywhere near a consumer-led recession during the month of July leaving open the possibility of a soft landing.  Friday also saw a positive print for consumer sentiment data which saw an increase in sentiment for the first time in five months.  Next week’s economic docket is extremely light but there is plenty of action to come in the weeks that follow. Looking ahead, we await Jerome Powell’s policy speech at The Jackson Hole Economic Symposium on August 23^rd, followed by core PCE release on August 30^th.  On September 6^th we will get the August employment report followed by a CPI print on the 11^th which could set the table for the beginning of an easing cycle with an FOMC decision on September 18^th.

Issuance

It was a solid week for corporate credit issuance as borrowing companies sold $29bln in new debt.  Monday in particular was a busy day as 16 companies priced more than $18bln of new bonds across dozens of maturity bands.  The last two weeks of August are typically seasonally slow but syndicate desks are looking for $20bln in new debt next week.  The backdrop for borrowers remains favorable amid strong investor demand for high quality risk assets at yields that remain elevated relative to the recent past.  The year-to-date issuance tally continues to push well ahead (+26%) of 2023’s pace and 2024 volume has now topped $1,068bln.

Flows

According to LSEG Lipper, for the week ended August 14, investment-grade bond funds reported a net inflow of +$1.14bln.  Short and intermediate investment-grade bond funds have seen positive flows 28 of the past 33 weeks.  YTD flows into IG stand at +$45.4bln.

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.

Credit spreads were meaningfully wider on the week while Treasuries rallied, sending yields lower.  The Bloomberg US Corporate Bond Index closed at 98 on Thursday August 1 after closing the week prior at 93.  The 10yr Treasury yield traded through its previous YTD low of 3.88% from back in January and it is trading at 3.85% this Friday morning.  This is after the 10yr benchmark closed last week at 4.19%. Through Thursday, the corporate bond index YTD total return was +2.16% while the yield-to-maturity for the benchmark was 5.10%.

Economics

It was a big week for data with all eyes on the Fed Wednesday afternoon.  The FOMC elected not to move its policy rate, as expected, and chairman Powell hinted at the fact that near term cuts could be on the horizon as soon as the September meeting.  What really threw markets into a tizzy was the NFP release on Friday morning which was a big miss to the downside.  As of the time we are going to print this morning the numbers are quite volatile.  Treasury curves are at their steepest levels of the 2024 and equity futures have fallen off a cliff.  The market narrative has quickly shifted from questioning if and when we would get a cut at all in 2024 to pondering 3 or 4 cuts.   Some market participants are now even calling for a 50bp cut at the September meeting for fear that the economy is slowing too rapidly. We would point out that this is only one job report, and by the way, the economy is still adding jobs not shedding them.  While the Sahm rule has been triggered, the unemployment rate still remains low by historical standards.  We have always been in the camp that expects a modest recession at some point and this jobs print could be the first step to that end but it is merely one data point.  One thing is certain, the market will have plenty of time to speculate between now and the FOMC’s next meeting on September 18^th.  It could be a long month and a half!

Issuance

It was once again another solid week for summer issuance as companies sold $31bln in new bonds.  It ended up as the highest volume July for issuance since 2017 and the second busiest ever.  Syndicate desks are looking for $40bln of new supply next week but that is contingent on a pull back in some of the volatility that the rates markets are experiencing this morning.  Even with spreads off their tights, CFOs and treasurers that were planning to borrow are likely excited at the prospect of lower Treasury yields which mean lower interest expense on new debt.  The year-to-date issuance tally has now climbed to $995bln.  For context, the $1 trillion mark was not reached until October during 2023 and 2022 according to Bloomberg.

Flows

According to LSEG Lipper, for the week ended July 31, investment-grade bond funds reported a net inflow of +$1.79bln.  Short and intermediate investment-grade bond funds have seen positive flows 26 of the past 31 weeks.  YTD flows into IG stand at +$42.5bln.

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.

Credit spreads were modestly wider on the week.  The Bloomberg US Corporate Bond Index closed at 93 on Thursday July 25 after closing the week prior at 91.  The 10yr Treasury yield was slightly lower on the week at press time, trading at 4.21% this Friday morning after closing last week at 4.24%. Through Thursday, the corporate bond index YTD total return was +0.61% while the yield-to-maturity for the benchmark was 5.32%.

Economics

It was quite a busy week for economic releases but most of what we got was in line with expectations with the exception of GDP which came in meaningfully better than consensus.  The biggest print of the week was the Fed’s preferred inflation gauge on Friday which showed that inflation rose at a timid pace in June while consumer spending held up well but not too well.  Traders viewed this as a print that keeps the hope alive for a soft landing as well as a likely cut in the Fed’s policy rate at its September meeting.  Next week is busy too with consumer confidence and ISM data as well as a FOMC rate decision on Wednesday and the June Employment report capping things off on Friday morning.  Interest rate futures as of this Friday morning are pricing a 95+% chance that the Fed holds the policy rate steady next week.

Issuance

It was a solid week for new supply with $29.5bln of new debt hitting the market, although this fell short of the $35bln estimate.    UnitedHealth led the way, pricing a $12bln issue to fund M&A, the 4^th largest deal of 2024.  Occidental Petroleum also priced a chunky $5bln new deal.  Next week syndicate desks are looking for $25bln of new debt.  If that figure comes to pass then this July will rank among the busiest ever and will challenge the record that was set for July in 2017 when companies priced $122bln.  July can often be a slow month for new issue supply but this year has been anything but.  The year-to-date issuance tally has now climbed to $964bln which is more than 25% ahead of where things stood at this point last year.

Flows

According to LSEG Lipper, for the week ended July 24, investment-grade bond funds reported a net outflow of -$0.034bln.  Short and intermediate investment-grade bond funds have seen positive flows 25 of the past 30 weeks.  YTD flows into IG stand at +$39.8bln.

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.