Category: Insight

(Bloomberg)  High Yield Market Highlights

• A back-and-forth start to the year has continued this week for the US junk bond market, which rose last week after starting 2024 with a loss.
• Yields have climbed 19 basis points since last Friday to 7.90%, following a week of robust economic data on retail sales, housing sentiment, industrial production and unemployment claims. The readings renewed concerns that the Federal Reserve may delay easing interest-rate policy, with investors paring rate-cut bets and Treasury yields climbing.
• High-yield’s losses gained legs as Fed Governor Christopher Waller’s comments Tuesday signaled the central bank isn’t in a hurry to cut rates
• Atlanta Fed President Raphael Bostic joined the chorus Thursday, urging policymakers to proceed cautiously toward rate cuts
• At the same time, strong data supported the soft landing narration and bolstered views that a recession is unlikely
• US borrowers crowded the primary market during this holiday-shortened week as yields are still below 8% and spreads are under 350 basis points
• More than $5.5b of deals were priced, putting January’s total above $12b and at 60% of volume in the opening month of 2023
• Junk bond yields climbed across ratings. BB yields jumped 18 basis points week-to-date to 6.58%

(Bloomberg)  Waller Urges Cutting Rates ‘Carefully’ If Inflation Cools

• Federal Reserve Governor Christopher Waller said the US central bank should take a cautious and systematic approach when it begins cutting interest rates, a process that can start this year absent a rebound in inflation.
• “As long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year,” Waller said at a virtual event hosted by the Brookings Institution on Tuesday.
• “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he added.
• The Fed governor offered some of the most detailed remarks to date around the Fed’s intentions to ease policy this year. While Waller showed an openness to cutting rates, his comments also appeared to push back against market expectations for as many as six rate cuts this year.
• “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past,” he said, pointing to previous economic shocks that have precipitated rapid rate cuts.
• Treasury yields jumped in the wake of Waller’s comments. Traders pared back the probability of a rate cut as soon as March as well as the degree of total policy rate declines seen for the full year.
• He said the timing of cuts and the actual number “will depend on the incoming data.”
• Waller’s remarks highlighted his intention to balance risks to both sides of the Fed’s mandate and avoid staying restrictive for too long, while also not beginning to reduce rates before their 2% inflation goal was secure. He noted that he needs to see a moderation in consumption and hiring as well as continued low readings on monthly inflation data to bolster the case for a cut.
• While Waller said he’s becoming more confident that policymakers are “within striking distance” of reaching their 2% inflation target, “I will need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably toward our inflation goal.”
• If policymakers see a continuation in the trends seen in the real data and inflation data, “we can slowly calibrate the real rate cut down,” he said. “If we think we need to move it faster, we can move it faster depending on what the data says. But the key is we have the flexibility that we can be methodical and careful.”
• He added that once the Fed is relatively convinced that inflation is sustainably near the central bank’s 2% target, policymakers can “start thinking how fast we want to cut, or how long, what the pace is, or how big.”
• As for the central bank’s balance sheet, Waller said it would be reasonable to start thinking about slowing the pace of asset runoff “some time this year.”
• While Waller’s language suggested he favors starting rate cuts sooner rather than later, his comments also weren’t “a ringing endorsement” for a March cut, Bank of America’s Michael Gapen wrote. Instead, he said, the key takeaway of Waller’s speech related to the pace of easing.
• Economists at Goldman Sachs also noted that Waller’s remarks “raise the risk that the first cut could come slightly later than our forecast of March and that the pace of cuts could be quarterly from the outset.”

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 fourth quarter US junk bond rally spurred by the Federal Reserve drove yields further down to a new 16-month low of 7.69% and spreads to a another 20-month low of 329 basis points accelerating gains in CCCs, the riskiest tier of the junk bond market.
• CCC yields tumbled to a 10-month low of 12.26% and spreads closed at a 19-month low of 787 basis points.
• CCCs amassed gains of almost 19%, the best year since 2016. The fourth quarter returns so far stand at 5.95%, on track to be the biggest quarterly gains since December 2020.
• CCCs are the best asset class in the US fixed income market as they outperform single Bs, BBs and investment grade.
• Bloomberg Economics expects that the Fed will lead the way with 125 basis points of cuts over the course of 2024, Tom Orlik wrote on Tuesday.
• After the Fed’s own quarterly projections indicated that the central bank will lower interest rates by 75 basis points next year, yields and spreads dropped across all ratings in the US high yield market.
• BB yields dropped to a new 10-month low of 6.41%. Yields have fallen 158 basis points since the November Fed meeting and 59 basis points so far this month. Spreads were at 205 basis points, down 90 basis points year-to-date after falling 120 basis points so far this quarter.
• The rally drew both borrowers and investors into the market, spurring new bond sales.
• The primary market is expected to be largely quiet ahead of the holidays.
• Forecasts for junk-bond supply in 2024 generally range from around $200 billion to $230 billion.

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

(Bloomberg)  High Yield Market Highlights

• US junk-bond yields plunged to a 10-month low and spreads dropped to a 20-month low after the Federal Reserve paused the most aggressive policy of raising interest rates for the third time in this week’s meeting, while also forecasting a series of rate cuts next year. Yields closed at 7.77% and spreads at 334 basis points. Junk bonds are headed for the fifth straight week of gains, with 1.95% returns week-to-date.
• The broad rally in high-yield bonds on news of the Fed pivoting to rate cuts spurred CCCs — the riskiest of junk debt — to post the biggest one-day gains in three years, with returns of 1.6% on Thursday. CCC yields tumbled 67 basis points to 12.37%, also a 10-month low. The demand for yield is not abating, Brad Rogoff and Dominique Toublan of Barclays wrote Friday morning.
• The rally in junk bonds, powered by a resilient economy and easing financial conditions, got further impetus from the Fed’s summary of economic projections. The central bank revised the growth forecast for 2023 to 2.6% from 2.1% it estimated in the September report.
• The Fed’s own quarterly projections showed it expects to lower rates by 75 basis points next year, a sharper pace of cuts than indicated in September.
• Bloomberg Economics expects rate cuts as early as March of next year.
• Gains in the US high-yield market were seen across ratings. Strong demand for credit to continue in the near-term, helping spreads grind tighter, Rogoff and Toublan wrote.
• The broader high-yield index racked up returns of 1.24% at close on Thursday.
• BB yields dropped  28 basis points to a 10-month low of 6.45% and spreads closed near a two-year low of 206 basis points.
• Single B yields fell 32 basis points to 7.72%, a 16-month low.
• Strong risk appetite, falling yields and spreads, and steady economic growth brought US borrowers into the market, driving new bond sales to $12b so far this month, already more than five times that of Dec. 2022.
• Issuance was predominantly for refinancing bonds and term loans.
• Most new sales priced at the lower end of price talk and drew orders of about three times the size of the offering.
• US junk bonds are poised to extend the rally on a broad risk-on sentiment after Chair Jerome Powell reinforced market expectations of a pivot to rate cuts.

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 broad November rally in risk assets propelled CCCs, the riskiest tier of the junk bond market, alongside equities, to post the biggest monthly returns since January of this year. CCC yields plunged 125 basis points in November, also the most in 10 months, to 13.50%, driving gains of 4.53%.
• The broad surge across risk assets was fueled by a market consensus that the Federal Reserve was finished with the most aggressive tightening cycle in decades and that it will begin to ease monetary policy by the middle of 2024. Junk bond spreads dropped to a 10-week low of 370 basis points, after falling 67 basis points in November, the biggest monthly decline in five months.
• The rally came as the 5- and 10-year Treasury yields dropped by about 60 basis points each during the month of November to close at 4.27% and 4.33%, respectively. Treasury yields plunged from near 5% on Oct. 19
• US junk bonds racked up gains of 4.53%, the largest in a month since July 2022, fueled by BBs. Yields fell 106 basis points to 8.43%, also the biggest monthly decline in 16 months
• BBs had the best performance in 16 months, with returns of 4.6% reversing the three-month losing streak as rates tumbled
• Yields crashed by 99 basis points to close near a four-month low of 7%, the biggest monthly decline in over a year
• Resilient growth, cooling inflation and a softening labor market gave a strong impetus to the November rally, luring investors and US borrowers from the sidelines
• November is the fourth busiest month for issuance as volume surged to $19.4 billion, more than double October’s total of $9.45 billion
• US junk bond funds were inundated with new cash as investors poured more than $11b in November
• Year-to-date supply stood at $163 billion, up by about 60% from 2022’s $102 billion
• Forecasts for junk bond supply in 2024 range from $200 billion to $230 billion, with the exception of BofA, which estimates gross supply to be around $165 billion, a 5% drop from its projection of $175 billion for 2023

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 headed for weekly gains as yields dropped 18 basis points week-to-date to 8.75% as of Thursday, after 5-year and 10-year US Treasury yields sank below 4.5%, falling about 19 basis points each. Yields fell below 9% and spreads below 400 basis points since the Federal Reserve signaled, after its meeting on Nov. 1, that it was likely finished with the most aggressive rate-hike campaign in decades.
• Economic data reports this month have shown a softening labor market with a rise in jobless claims, combined with cooling inflation and an unexpected decline in prices paid to US producers, which have all reinforced market consensus that interest rates were sufficiently restrictive.
• Resilient growth combined with falling yields lured more investors into the asset class for the second consecutive week as retail funds were inundated with new cash. US high-yields funds reported a cash intake of $4.55 billion for week ended Nov. 15, after an inflow of $6.26 billion in the previous week, the third biggest on record.
• The combined inflow of more than $10b in the last two weeks is the largest two-week intake for these funds since June 2020, JPMorgan wrote.
• The US junk bond rally spanned across ratings. Robust economic data and easing rate concerns fueled November gains across all high-yield ratings.
• Junk bonds are on track for weekly gains of 0.8%, driving the month-to-date returns to 2.96%, which would be the best since January.
• BB yields tumbled 17 basis points week-to-date to 7.33%. Yields were down 66 basis points month-to-date from near 8% in October. BBs are set to post gains for the week, with week-to-date returns at 0.75%. November gains are at 3%, also the best since January.
• CCC yields have plunged 40 basis points week-to-date, the most in the high yield, to close at 13.84%. Yields tumbled 91 basis points month-to-date from near 15% in October.
• The probability of a soft landing has increased with the recent macro data driving a rally in risk assets in the past two weeks, Brad Rogoff of Barclays wrote in a Friday note.
• Cash surge and a steady rally has drawn US borrowers into the market as $4.3 billion of new junk bonds has priced week-to-date, driving the month’s volume to more than $14 billion, up 53% already from the full month of October.
• Supply is led by refinancing needs. Almost 90% of the supply is to refinance outstanding debt.
• 60% of new bonds were secured notes.
• More borrowers are expected to take advantage of lower yields and chip away at a wave of 2025 maturities.

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.