Category: Insight

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed toward their worst weekly loss since June after steadily falling for five straight sessions. Thursday’s loss of 41% is the biggest one-day slide in six weeks as yields rose 10 basis points to a more than five-week high of 8.67%.
• Risk appetite softened after minutes of the last Fed meeting indicated that the Fed was not done with raising interest rates. The BB index is on track for the biggest weekly loss since February, with week-to-date negative returns at 0.8%.
• BB yields soared to a five-month high of 7.37%. CCCs may also end the week with the biggest loss in six.
• The Fed minutes did not give a definitive steer on the next rate decision in September, saying future moves “should depend on the totality” of incoming data and its implications for the outlook.
• Wary investors pulled cash from US high yield funds, with an outflow of $1.09b for week ended August 16. This is the fourth consecutive week of outflows from the asset class.
• The June to July rally in junk bonds, fueled by easing inflation pressures and on expectations that the Fed was nearing the end of the rate-hiking cycle, pulled US borrowers out of the sidelines.
• Light primary activity, still solid corporate fundamentals, and broad shifts in index quality and sector composition have all contributed to relatively tight spreads, Amanda Lynam, head of macro credit research at BlackRock Financial Management, wrote last week.

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 rebound from last week’s losses and are headed to post the biggest weekly gain since mid-July. After steadily rallying for five straight sessions buoyed by a subdued consumer inflation reading, expectations are rising that the Federal Reserve will pause its interest-rate hiking campaign.  The current wave of disinflation has legs, primarily reflecting the lagged impact of past Fed hikes and a downshift in economic activity, wrote Bloomberg economists Anna Wong and Stuart Paul on Thursday.
• The rally in junk bonds gained momentum after the smallest back-to-back gains in US consumer prices in more than two years.
• Philadelphia Fed President Patrick Harker said the US central bank may be able to cease interest-rate increases, barring any surprises in the economy. Richmond Fed President Thomas Barkin said it was too soon to say whether another rate increase at the Fed’s next meeting in September would be appropriate.
• The gains spanned across all high yield ratings, with CCCs, the riskiest of junk bonds, also recovering from last week’s losses to post gains of 0.99% week-to-date, the biggest since mid-July.
• CCC yields tumbled 26 basis points on Thursday to close at 12.79% after dropping in the three of the last four sessions. Yields fell 21 basis points for the week.
• BBs ended the two-week losing streak, with week-to-date returns of 0.28%.
• Goldman Sachs strategists led by Lotfi Karoui and Michael Puempel assess the near-term risks from corporate debt on US economy and markets, and conclude that risks are manageable and are unlikely to present any systemic risk.
• The rally also drove the primary market, with the week-to-date volume at almost $5b pushing the month-to-date tally to more than $7b.

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 the worst weekly loss in six, as risk appetite wobbled on Fitch’s downgrade of US government debt, higher longer-dated Treasury yields and a Senior Loan Officer Opinion Survey that showed tightening lending standards.  While it was business as usual for the primary market, the week-to-date losses, at 0.72%, span the ratings spectrum. BBs, the top ratings in the junk universe, are on track for the biggest weekly loss in almost four months.
• The high yield index yield rose to a three-week high of 8.61%.
• BB yields jumped 22 basis points to 7.27%, a four-week high. CCC yields rose 31bps to 13.15%, also a four-week high.
• CCCs are also poised for the biggest weekly loss in six, with negative returns of 0.83% week-to-date.
• After reaching year-to-date tights at the end of July, spreads widened sharply amid a significant increase in long-dated Treasury yields, Brad Rogoff and Dominique Toublan wrote this morning. These developments, if sustained, could pose a challenge to the soft-landing narrative, they wrote.
• The broader risk-off sentiment initially fueled by Fed survey of senior loan officers renewed concerns of a possible recession and a spike in default rates. The selloff gained momentum after Fitch action on US debt.
• Investors pulled over $1b from US high yield funds for the week ended Aug. 2, the biggest weekly outflow from high- yield funds since May.
• However, US borrowers were largely undeterred. The primary market priced more than $3b this week. And banks, led by Citigroup and Bank of America, are readying to offload some of the debt that helped fund Apollo Global Management’s buyout of the auto-parts maker Tenneco as early as next week.

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 lost some momentum on renewed concerns that strong macro data will pressure the Federal Reserve to raise rates again, prolonging the most aggressive policy tightening in decades. Junk bonds posted a modest loss of 0.1% on Thursday, on pace to end the two-week gaining streak. Yields jumped nine basis points to 8.44%, the biggest one-day increase in more than two weeks, after rising steadily in three of the last four sessions.
• Gross domestic product accelerated, orders for business equipment were stronger-than-expected and unemployment claims were lower despite an aggressive interest-rate hike campaign with rates at a 22-year high. Fed Chair Jerome Powell said the central bank could raise or hold in September, depending on the data.
• The softness extended across ratings in the US high yield market. The week-to-date losses in single-Bs are 0.03% and BBs 0.16%.
• CCCs, the riskiest part of the US high yield market, bucked the broad trend. CCCs are heading toward third consecutive week of gains, with week-to-date returns at 0.38%, after rallying for straight sessions.
• The gains in CCCs were partly fueled on expectations that the economy will dodge recession.
• “The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Powell said Wednesday during a press conference following a policy meeting.
• US high yield funds reported an outflow of $376m for week ended July 26.
• The primary market was steadily building up, though a tad cautiously, as US borrowers took advantage of strong technicals, namely light supply.
• New bonds were inundated with demand as investors looked for new paper amid thin supply.

(Bloomberg)  Fed Raises Rates as Powell Keeps Options Open for Future Hikes

• The Federal Reserve resumed raising interest rates and Chair Jerome Powell left open the possibility of further hikes, which he emphasized will depend on incoming data that has recently signaled a resilient US economy.
• After pausing rate increases in June, policymakers lifted borrowing costs again at their policy meeting on Wednesday for the 11th time since March 2022 to curb inflation. The quarter percentage-point hike, a unanimous decision, boosted the target range for the Fed’s benchmark federal funds rate to 5.25% to 5.5%, the highest level in 22 years.
• While Powell pointed to encouraging signs that the Fed’s rate hikes are working to curb price pressures, he reiterated that policymakers have a long way to go to return inflation to their 2% goal.
• The Fed chief refused to be pinned down on when officials may hike again, citing a raft of economic reports due before the Fed’s next meeting in September, including two jobs reports, two reports on consumer-price inflation and data on employment costs.
• “All of that information is going to inform our decision as we go into that meeting,” he said. “It is certainly possible that we would raise [rates] again at the September meeting, if the data warranted. And I would also say it’s possible that we would choose to hold steady at that meeting.”
• Markets took the decision in stride. Swaps traders held fairly steady the probability they see of the Fed hiking rates by an additional quarter point before year’s end. The pricing implies just slightly over 50% chance of another bump higher before the Fed tightening cycle ends.

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 US junk-bond rally stalled after data showing a resilient labor market renewed concerns that the Federal Reserve may not stop its interest-rate hikes after the quarter-point move expected next week.  The securities posted a modest loss of 0.03% on the week as yields rose seven basis points to 8.36. The weakness extended across ratings as CCC yields jumped nine basis points to 12.66% and BB yields 11 basis points to 7%, the most in two weeks.
• Though the rally paused on Thursday after the labor data, tightening spreads, easing recession concerns and steadily declining inflation continued to draw cash into the market.
• US high-yield funds reported cash inflows of $2.22b for week ended July 19, the first in three weeks, driving demand for new bonds.
• The primary market revived, pricing more than $3b this week, driving month-to-date tally to almost $4b.
• The recent rally was primarily fueled by expectations the Fed’s move in the next meeting would be its last.

(Bloomberg)  Goldman Sachs Says This Yield Curve Inversion Is Different

• While the deeply inverted yield curve has stoked anxiety among investors about the prospect of a recession, Goldman Sachs Group Inc. has a different message: stop worrying about it.
• “We don’t share the widespread concern about yield curve inversion,” Jan Hatzius, the bank’s chief economist wrote in a note Monday, cutting his assessment of the probability of a recession to 20% from 25%, following a lower-than-expected inflation report last week.
• Hatzius stands in opposition to most investors who point out that the curve inversion has an almost impeccable track record of foretelling economic downturns. The three-month T-bills yielded more than 10-year notes before each of the past seven US recessions. Currently, the short-term yields are more than 150 basis points above the longer-maturity notes, close to the biggest inversion in four decades.
• Normally, the curve is upward sloped because investors demand higher compensation — or term premium — for holding longer-maturity bonds than short-term ones. When the curve turns upside down, it means investors are pricing in rate cuts large enough to overwhelm the term premium, such a phenomenon only occurs when recession risk becomes “clearly visible,” Hatzius explained.
• This time, though, things are different, the economist said. That’s because term premium is “well below” its long-term average, so it takes fewer expected rate cuts to invert the curve. In addition, as inflation cools, it opens “a plausible path” to the Federal Reserve easing up on interest rates without triggering a recession, according to Hatzius.
• When economic forecasts became overly pessimistic, Hatzius added, they put more downward pressure on longer-term rates than justified.

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.