Category: Insight

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed toward the third straight week of losses and the biggest weekly loss in more than two months, pushing yields to a seven-week high on worries over negotiations to raise the debt ceiling. The week-to-date loss is 0.45%.
• The losses spanned ratings categories. US high yield funds reported an outflow of $1.15b for week ended May 17, the third consecutive week of outflows.
• Yields have risen amid higher inflation expectations and hawkish commentary from Fed officials, while the outlook for economic growth has deteriorated across major developed markets, Barclay’s Brad Rogoff wrote in a note.
• This creates greater uncertainty about the June Fed decision, Rogoff wrote.
• Even as yields rose steadily and nervous investors stayed on the sidelines, the primary market saw a deluge of new issuance, with borrowers rushing to get ahead of any jumps in yields spurred by gridlock in the negotiations to raise the US debt ceiling.
• As US borrowers made a quick dash to the market, the week-to-date tally rose to $3.5b. The month-to-date supply jumped to more than $13b. The year-to-date volume stood at almost $71b.
• CCCs have bucked the overall trend as yields dropped on Thursday to 13.49% and has risen by just 6bps week-to-date versus a 35bps jump single B yields and 17bps in BBs.
• BBs posted losses for six days in a row and are on track to see the biggest weekly decline, with week-to-date losses of 0.54%, the biggest since March 10.

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

(Bloomberg)  High Yield Market Highlights

• The junk market snapped the knee-jerk rally that followed the Fed meeting where Chair Jerome Powell said that the central bank was “much closer to the end” of the rate-hike campaign after raising interest rates by a quarter percentage point. US junk bonds posted the biggest one-day loss in seven weeks Thursday following drops in three of the last four sessions. After a frenzy of primary issuance, the asset class is headed for the biggest weekly decline since mid-March. Yields moved to a five-week high of 8.65% with spreads around +489 basis points.
• The high yield market had a lagged response to the collapse and takeover of First Republic Bank and plunging shares of PacWest Bancorp and Western Alliance Bancorp after rounds of trading halts.
• US junk bond borrowers rushed to sell bonds ahead of jobs data and any further volatility in the US regional banking industry rattling the financial stability. The primary market was inundated with new bond sales.
• The market sold more than $5b this week, making it the busiest since early April. The month- to-date supply of $5b surpassed May’s supply of $4b last year in just four sessions.
• The junk bond market losses extended across the rating spectrum on fresh concerns about financial stability.
• BB yields surged to cross the 7% level and close at 7.03%, a five-week high and the biggest one-day jump in seven weeks after rising steadily in three of the last four sessions. BBs also posted the biggest one-day loss since mid-March and is headed toward a weekly loss of 0.76%, the biggest since March 10.
• CCCs continue to be the best performing asset class in the high yield market, with a loss of 0.5% week-to-date versus 0.76% in BBs and 0.78% in single Bs.

(Bloomberg)  Fed Hikes Rates by Quarter Point, Powell Hints at Possible Pause

• The Federal Reserve raised interest rates by a quarter percentage point and hinted it may be the final move in the most aggressive tightening campaign since the 1980s as economic risks mount.
• “The committee will closely monitor incoming information and assess the implications for monetary policy,” the Federal Open Market Committee said in a statement Wednesday. It omitted a line from its previous statement in March that said the committee “anticipates that some additional policy firming may be appropriate.”
• Instead, the FOMC will take into account various factors “in determining the extent to which additional policy firming may be appropriate.”
• “That’s a meaningful change that we’re no longer saying that we anticipate” further increases, Chair Jerome Powell said at a press conference after the decision, when asked whether the statement is a signal that officials are prepared to pause rate increases in June. “So we’ll be driven by incoming data, meeting by meeting, and we’ll approach that question at the June meeting.”
• The increase lifted the Fed’s benchmark federal funds rate to a target range of 5% to 5.25%, the highest level since 2007, up from nearly zero early last year. The vote was unanimous, and Powell said support for the 25 basis-point rate increase was “very strong across the board.”
• Whether that rate will prove to be high enough to bring inflation back to the Fed’s 2% target will be an “ongoing assessment” based on incoming data, Powell said, adding later that Fed officials’ outlook for inflation does not support rate cuts.
• Powell said bank conditions had “broadly improved” since early March, but said the strains in the sector “appear to be resulting in even tighter credit conditions for households and businesses,” following a tightening in credit over the past year.
• “In turn, these tighter credit conditions are likely to weigh on economic activity, hiring and inflation,” he said. “The extent of these effects remains uncertain.”
• Powell said Wednesday it’s possible the US could experience what he hopes would be a mild recession, but “the case of avoiding a recession is in my view more likely than that of having a recession.” Wage increases have been moving down, and job openings have declined but have not been accompanied by rising unemployment, he said.

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

(Bloomberg)  High Yield Market Highlights

• US junk bonds are posted to close the month with modest gains, outperforming investment-grade bonds, on expectations the Fed may pause its rate-hike campaign after an anticipated 25bps increase at the next policy meeting. The struggles of First Republic Bank this week reinforced that market consensus. The gains spanned the risk spectrum, propelled by CCCs, the riskiest of junk bonds, with a month-to-date return of 2%, the most since January’s 6.06%. CCCs rebounded from a loss of 1.37% in March.
• The April rally was also partly fueled by cash inflows into US high-yield funds. US junk bond funds reported a cash haul of almost $8b in April as investors returned to the asset class after pulling nearly $7b in March amid turmoil in the banking industry.
• CCCs were the best-performing assets in the US fixed- income market. Yields tumbled 32bps month-to-date to 13.12% while BB yields rose 6bps to 6.86%. The broader junk bond index yield rose 3bps for the month to 8.55%.
• The primary market was revived with a steady stream of borrowers ranging from bankers offloading debt sitting on their books to gaming and travel.
• The year-to-date supply is at $56.5b, up 4.4% year-over-year.

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

(Bloomberg)  High Yield Market Highlights

• US junk bonds are set to lose this week by the most in six weeks, ending a month long rally as investors brace for at least one more interest rate hike by the Federal Reserve. Yields in the risky debt jumped by 18 basis points this week to 8.58%, the highest since late March. For traders, the risk is that higher-for-longer rates will expedite recession. An uptick in US jobless claims hinted at some softening in the US labor market, while a gauge of manufacturing activity in the Philadelphia area fell to the lowest level since May 2020.
• Junk bond spreads widened to +454. Spreads rose and the junk bonds posted negative returns in three of the last four sessions.
• The losses in the US junk bond market spanned all ratings. BBs are on track for a weekly loss of 0.58%, the biggest since the week ended March 10. Yields closed Thursday at 6.90%, a three-week high.
• While large cap bank earnings have been fine so far, recent data suggest economic weakness in the manufacturing, Barclays’s Brad Rogoff wrote this morning.
• US high yield funds reported a cash haul of more than $3b for the week ended April 19, a third week of inflows. Two of the past three weeks saw an inflow of more than $3b.
• The US junk bond primary market has seen a steady stream of borrowers.
• Borrowers are rushing in ahead of the next Fed meeting as they wait for some hints on the future path of the monetary policy after a widely expected 25bps hike.
• Month-to-date issuance volume has jumped to $14b and year-to-date supply is at $53b.

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

(Bloomberg)  High Yield Market Highlights

• US junk bonds staged the biggest one-day rally in two weeks, capping a six-session advance that marks the longest winning streak in more than three months. Yields tumbled to a two-month low of 8.38% and spreads dropped below +450 to close at +446, the tightest in five weeks. The rally gained momentum as the latest readings on jobless claims and producer price index fueled expectations that the Federal Reserve is nearing the end of its aggressive monetary policy tightening.
• Junk bonds are headed for fourth week of gains, with week-to- date returns at 0.84%, the longest winning streak since December.
• The gains spanned across all high-yield ratings drawing more investors to junk bonds. The HYG and JNK ETFs reported combined cash haul of almost $2b on Thursday.  HYG saw an inflow of $955m, the biggest net inflow since Feb. 2, and JNK’s inflow of $960m was the biggest since November last.
• CCCs, the riskiest of junk bonds, were the best performing asset in the high-yield universe. Yields plunged to an almost two- month low of 13.14% and spreads were at a five-week low of +946.
• The minutes of the March 21-22 Fed meeting showed that a group of policy makers weighed pausing and called for flexibility on decisions in the upcoming meetings. The Fed staff projected a “mild recession” starting later in 2023, followed by a recovery in subsequent two years.
• Fed officials have also signaled that some pause may be warranted.
• The primary market sees a window of opportunity here as investors pile on new issues as they look for opportunities to put money to work.
• The market has priced $12b month-to-date driving the year-to-date tall to almost $51b.

(Bloomberg)  Fed Leans Toward Another Hike, Defying Staff’s Recession Outlook

• Federal Reserve officials appear on track to extend their run of interest-rate hikes when they meet next month, shrugging off their advisers’ warning of recession with a bet that they need to do a little more to curb inflation.
• Minutes of last month’s policy meeting showed officials dialed back expectations of how high they’ll need to lift rates after a series of bank collapses roiled markets last month. Still, officials raised their benchmark lending rate a quarter point to a range of 4.75% to 5%, as they sought to balance the risk of a credit crunch with incoming data showing price pressures remained too high.
• They did so even after hearing from Fed staff advisers that they were forecasting a “mild recession” later this year.
• Officials agreed “some additional policy firming may be appropriate,” according to minutes of the Federal Open Market Committee gathering, a posture several Fed speakers have reiterated in recent days.
• Policymakers “commented that recent developments in the banking sector were likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation,” the minutes said, though they agreed the extent of the effects was uncertain. “Against this background, participants continued to be highly attentive to inflation risks.”
• Earlier Wednesday a key measure of US inflation showed hints of moderating in March, but likely not by enough to dissuade the Fed from a rate hike in May.

• Economists see the most likely outcome as a quarter-point increase at the next meeting, followed by an extended pause. But the language in the minutes, coupled with some officials’ comments and a still-uncertain outlook for the impact of credit tightening on the economy, point to a rate path that may not be fully settled.

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.