Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$48.5 billion.  New issuance for the week was $2.2 billion and year to date issuance is at $104.9 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds snapped a six-day rally as yields surged 13bps to 8.45%, marking the biggest one-day loss in more than five weeks, after central banks signaled more rate hikes are needed to cool the rate of inflation.  Fed Chair Jerome Powell reiterated the central bank’s hawkish stance and said the bank is not close to ending its rate-hike campaign to tame inflation, a sentiment echoed by European Central Bank President Christine Lagarde.
• The hawkish tilts from the FOMC and ECB reversed the more positive sentiment earlier in the week spurred by a slowdown in the consumer-price index, Barclays’s Bradley Rogoff wrote on Friday.
• Bloomberg economists Anna Wong, David Wilcox and Eliza Winger wrote that the most striking part of the updated economic projections by the Federal Reserve “is how unified the committee is on the need to raise rates more aggressively – significantly higher than the 4.8% terminal rate markets had priced in ahead of the meeting.”
• The losses spanned across all high yield ratings. BB yields rose 11bps to 6.77%, the biggest one- day jump in four weeks. The BB index posted the biggest one-day loss in more than five weeks and ended a six-day gaining streak.
• CCC yields rose 13bps to 13.79%. The index posted a loss of 0.37% on Thursday, the most in more than two weeks, after gaining for five straight sessions.
• The junk bond primary market has ground to a halt, with just a little over $2b in new bond sales month-to-date, the slowest since December 2018. The rest of the year is expected to be quiet on the new issue front as investors work on the year- end closings.

(Bloomberg)  Powell Says Fed Still Has a ‘Ways to Go’ After Half-Point Hike

• Chair Jerome Powell said the Federal Reserve is not close to ending its anti-inflation campaign of interest-rate increases as officials signaled borrowing costs will head higher than investors expect next year.
• “We still have some ways to go,” he told a press conference on Wednesday in Washington after the Federal Open Market Committee raised its benchmark rate by 50 basis points to a 4.25% to 4.5% target range.
• Powell said that the size of the rate increase delivered on Feb. 1 at the Fed’s next meeting would depend on incoming data — leaving the door open to another half-percentage point move or a step down to a quarter point — and he pushed back against bets that the Fed would reverse course next year.
• “I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” he said. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said.
• “The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the FOMC said in its statement, repeating language it has used in previous communications.
• “It is our judgment today that we are not at a sufficiently restrictive policy stance yet,” the Fed chief said. “We will stay the course until the job is done.”
• Powell had previously signaled plans to moderate hikes, while emphasizing that the pace of tightening is less significant than the peak and the duration of rates at a high level.
• The decision follows four consecutive 75 basis-point hikes that have boosted rates at the fastest pace since Paul Volcker led the central bank in the 1980s.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at -$47.8 billion.  New issuance for the week was nil and year to date issuance is at $101.2 billion.

(Bloomberg)  High Yield Market Highlights

• The recent rally in U.S. junk bonds has been steadily losing steam, edging lower for three consecutive sessions in the run up to a likely modest weekly loss, after warnings from bank chiefs of a slowing economy next year renewed recession fears. The losses extended across ratings as yields rose 17bps week-to-date to 8.55%.
• Market tone has softened since mid-October, according to Barclays strategist Bradley Rogoff.
• Focus will be on next week’s CPI data and Fed meeting for indications on future rate hikes and terminal rate expectations, wrote Rogoff on Friday.
• The rally, though more muted this week, also opened a window for banks to offload a portion of their large hung LBO debt.
• A group of banks found willing buyers for $750m of debt tied to the buyout of Citrix Systems.
• Thursday end with spread levels of 446 for the high yield market. Spreads by rating:  283 for BB, 464 for B, and 983 for CCC.
• Year-to-date the high yield index total return stands at -10.13%.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$47.5 billion.  New issuance for the week was nil and year to date issuance is at $101.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are poised to gain for the fourth straight week, the longest winning streak since mid-August, with yields tumbling to mid-September lows after Federal Reserve Chair Jerome Powell signaled on Wednesday that the central bank will likely slow the pace of interest-rate increases. The biggest gains came on Thursday, when the market saw its best advance in more than three weeks after the Fed’s favored inflation gauge posted a smaller-than-expected monthly advance and data showed a cooling in the manufacturing sector.
• The inflation measure, the personal consumption expenditures index, rose 0.3% in October, less than the 0.4% forecast by economists.
• The rally that followed the release Thursday drove the junk-bond market to a weekly gain of 0.88% and pushed yields down to 8.43%, a more than 11-week low.
• The gains spanned across ratings. CCC yields fell significantly below 14% to close at 13.83%, a more than 11-week low.
• CCCs are also headed for the fourth straight week of gains, with week-to-date returns of 0.73%. The 0.99% gains on Thursday were the biggest one-day rally in three weeks.
• The recent rally in the junk bond market was also partly fueled by lack of supply. The primary market is expected to largely remain quiet as banks work out of the losses from this year’s leveraged buyout debt.
• October was the slowest month for new bond sales since 2008, with a mere $3.7b. November ground to a halt after a promising start to end with a modest $9b, the slowest for that month since 2018.
• Year-to-date supply at $95b has also been the lightest in 14 years.
• Junk bonds are losing steam early Friday post stronger than expected employment data.

(Bloomberg)  Powell Signals Downshift Likely Next Month, More Hikes to Come

• Chair Jerome Powell signaled the Federal Reserve will slow the pace of interest-rate increases next month, while stressing borrowing costs will need to keep rising and remain restrictive for some time to beat inflation.
• His comments, in a speech Wednesday at the Brookings Institution in Washington, likely cement expectations for the Fed to raise interest rates by 50 basis points when they meet Dec. 13-14, following four straight 75 basis-point moves.
• “The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in the text of his speech. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”
• The Fed’s actions — the most aggressive since the 1980s — have lifted the target range of their benchmark rate to 3.75% to 4% from nearly zero in March. Powell said rates are likely to reach a “somewhat higher” level than officials estimated in September, when the median projection was for 4.6% next year. Those projections will be updated at the December meeting.
• Investors see the Fed pausing hikes in the second quarter once rates reach about 5%, according to pricing in futures contracts.
• Powell said the central bank is forecasting 12-month inflation based on its preferred gauge, the personal consumption expenditures price index, of 6% through October, and a 5% core rate.
• There hasn’t been enough strong evidence to make a convincing case that inflation will soon decelerate, he said.
• “It will take substantially more evidence to give comfort that inflation is actually declining,” he said. “The truth is that the path ahead for inflation remains highly uncertain.”
• He added that “despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.”
• Powell launched into a discussion of service costs, focusing on scarce supply in the labor market, with the gap in labor-force participation mostly explained by pandemic-era retirements in his view.
• “These excess retirements might now account for more than 2 million of the 3 1/2 million shortfall in the labor force,” he said.
• He said the labor market is only showing “tentative signs” of what he called “rebalancing,” while wages are “well above” levels consistent with 2% inflation over time.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.7 billion and year to date flows stand at -$55.1 billion.  New issuance for the week was $1.5 billion and year to date issuance is at $93.5 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are set for the biggest weekly loss in six, snapping a two-week gaining streak as yields surge to 9.22% as recession fear spurred a selloff in equities and an extreme inversion in a key portion of the Treasury yield curve. The low-grade market erased most recent gains across ratings. CCCs, the riskiest of junk bonds, posted a loss of 1.04% Thursday, the biggest one-day fall in more than four months. That’s put the notes on track to end a two-week gaining stretch, with a week-to-date drop of 1.08%.
• The October rally fueled and lured investors into junk bond market as US high-yield funds reported a cash intake of $4.7b for the week, the third biggest weekly inflow this year.
• The cash haul came in at the time of acute shortage of new supply, bolstering secondary market prices as investors looked for new paper. The primary market was mostly quiet until this week.
• The rally brought some relief to bankers who have long waited to clear all pending deals to fund leveraged buyout. Apollo’s Tenneco was the first to get out of the gate earlier this week. Nielsen Holdings, a US TV rating business firm, kicked off a bond sale Wednesday to fund its buyout by Elliott Investment Management and Brookfield Asset Management.
• Satellite TV company Dish Network also jumped into the market Wednesday to start marketing 5-year notes to fund the build-out of wireless infrastructure, among other purposes.
• The rally was sapped after the Federal Reserve signaled a higher terminal rate against a backdrop of slowing growth.
• Despite continued near-term  pressures Morgan Stanley expects a “significant deceleration in the inflation path” to take hold by mid-2023, Morgan Stanley’s Srikanth Sankaran wrote last week.

(Bloomberg)  Powell Sees Higher Peak for Rates, Path to Slow Tempo of Hikes

• Federal Reserve Chair Jerome Powell opened a new phase in his campaign to regain control of inflation, saying US interest rates will go higher than earlier projected, but the path may soon involve smaller hikes.
• Addressing reporters Wednesday after the Fed raised rates by 75 basis points for the fourth time in a row, Powell said “incoming data since our last meeting suggests that ultimate level of interest rates will be higher than previously expected.”
• Powell said it would be appropriate to slow the pace of increases “as soon as the next meeting or the one after that. No decision has been made,” he said, while stressing that “we still have some ways” before rates were tight enough.
• “It is very premature to be thinking about pausing,” he said.
• The Federal Open Market Committee said that “ongoing increases” will still likely be needed to bring rates to a level that are “sufficiently restrictive to return inflation to 2% over time,” in fresh language added to their statement after a two-day meeting in Washington.
• The Fed’s unanimous decision lifted the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008.
• “Slower for longer,” declared JP Morgan Chase & Co, chief US economist Michael Feroli in a note to clients. “The Fed opened the door to dialing down the size of the next hike but did so without easing up financial conditions.”
• Officials, as expected, said they will continue to reduce their holdings of Treasuries and mortgage-backed securities as planned.
• The higher rates go, the harder the Fed’s job becomes. Having been criticized for missing the stubbornness of the inflation surge, officials know that monetary policy works with a lag and that the tighter it becomes the more it not only slows inflation, but economic growth and hiring too.
• Still, Powell stressed that they would not blink in their efforts to get inflation back down to their 2% target.
• “The historical record cautions strongly against prematurely loosening policy,” he said. “We will stay the course, until the job is done.”
• Fed forecasts in September implied a 50 basis points move in December, according to the median projection. Those projections showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024. Powell’s remarks made clear that the peak signaled in that projection would be higher if it came at this meeting.
• No fresh estimates were released at this meeting and they won’t be updated again until officials gather Dec. 13-14, when they will have two more months of data on employment and consumer inflation in hand.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.7 billion and year to date flows stand at -$59.9 billion.  New issuance for the week was nil and year to date issuance is at $92.0 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed for their biggest weekly gain in more than three months after a four-session rally as investors flooded the market with cash looking for new paper. A gauge of the debt rose 0.57% Thursday, the biggest one-day gain in more than three weeks. It was headed for the best week since June, up 1.93% so far this week.  The rally was partly fueled by investors returning to the asset class as US high-yield funds reported a cash influx of $3.7b for the week.
• The cash haul came at a time when the junk bond primary market faced an acute shortage of new supply, helping to bolster secondary-market prices.
• October supply is down by more than 85% from 2021; The year-to-date supply is the lowest since 2008 at $92b, versus more than $415b for the same period last year.
• The recent rally in junk bonds suggests the high-yield market is slowly coming around to the view that inflation’s pace is slowing and may begin to decline in the middle 2023.
• Despite continued near-term pressure, Morgan Stanley expects a “significant deceleration in the inflation path” to take hold by mid-2023, Srikanth Sankaran wrote on Monday.
• A potential window of respite from rates volatility and a more dispersed period of earnings risk should help to provide tactical support for credit markets, Sankaran wrote.
• Amid this issuance-starved market, a group of banks led by Citigroup may sell as soon as next month part of a leveraged loan that’s financing Apollo’s buyout of Tenneco, according to people with knowledge of the matter.
• The rally extended across all high yield ratings. Yields tumbled to a five-week low of 9.12% after falling for five sessions in a row, the longest declining streak in almost three months. Yields fell 56bps in the last four sessions.
• Single B and BB rated bond yields also fell to a five-week low of 9.35% and 7.33%, respectively.
• CCCs, the riskiest of junk bonds are up 1.52% this week as of Thursday, set for the biggest weekly advance in almost three months. CCC yields dropped 38bps this week to close at 15.44%, a more than two-week low.

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.