Category: Insight

16 Jun 2023
Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Investment grade credit spreads experienced a steady grind tighter this week.  The Bloomberg US Corporate Bond Index closed at 133 on Thursday June 15 after having closed the week prior at 138.  The investment grade credit market is feeling good vibes again as we go to print this Friday morning.  Equity futures too are in the green after a strong risk rally on Thursday.  Treasuries may finish the week unchanged.  The 10yr Treasury is currently 3.74%, which is exactly where it closed trading last week.  There were times this week where it looked like the 10yr would break through 3.85% but mixed economic data sparked a bit of a rate rally on Thursday morning.  Through Thursday June 15 the Corporate Index had a YTD total return of +3.03%.

The economic data this week was mixed for the most part which is the continuation of a larger theme we have experienced in recent months.  The data is and has been varied enough that bears, bulls and prognosticators of all stripes can pick and choose, arriving at a variety of views and outlooks.  The biggest news during the week of course was Wednesday’s Fed meeting, although the result was so well telegraphed in advance that it was largely a non-event for markets.  The Fed paused for the first time in 15 months but may look to resume hikes as soon as July and the Fed’s own projections are calling for two additional hikes in 2023.  Speaking of Fed projections, we would point out that, one year ago at its June 2022 meeting, the median Fed dot plot implied a June 2023 target rate of 3.75% while the actual current Fed Funds rate is 5.25%.  This miscalculation does not mean that the Fed is bad at its job or that it is not credible.  The Fed has a very difficult task against an evolving backdrop and its predictions are not prophecy.  We believe that economic data and especially the labor market will continue to guide the Fed in its decision making.

Issuance was very light this week with just $10.4bln in new debt relative to consensus estimates of $15-$20bln.  This isn’t too shocking to us as issuance is usually light during weeks when the Fed meets and the calendar is getting more into the summer vacation season.  The market is also closed next Monday for the Juneteenth holiday.  With nine business days left in the month, June has seen $61bln in issuance.  Next week the street is looking for $15bln in new debt.

According to Refinitiv Lipper, for the week ended June 14, investment-grade bond funds collected more than $4bln of cash inflows.  IG inflows have been consistently positive in recent weeks and this was one of the strongest weeks of the year so far.

 

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.

09 Jun 2023
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

 

 

  • US junk bonds are heading for a modest weekly gain as investors debate whether the Federal Reserve will pause its tightening campaign or keep rates higher for longer following the example of the Bank of Canada.
  • Signs of bullish sentiment can be seen as US high yield funds reported a cash haul of $2.5b for week ended June 7, according to Refinitiv Lipper, marking a U-turn after investors pulled $4.7b in four of the five weeks in May.
  • The week-to-date gains are 0.16%.
  • Yields rose seven basis points week-to-date to 8.61% and rose in two the last four sessions after dropping for two consecutive weeks.
  • While the high yield market slowed down a tad this week, CCCs outperformed BBs and single Bs, with week-to-date returns of 0.73% compared to a loss of 0.1% and a gain of 0.3% in BBs and single Bs, respectively.
  • CCC yields dropped 6 bps on Thursday to close at 13.22%. Yields fell in two of the last four sessions.
  • CCCs have been some of the best performing assets in the US corporate debt market this year, with year-to-date returns of 7.62% compared with 2.59% in investment grade, and BBBs in particular, with 2.76%.
  • Risk assets have rallied materially in the last couple of weeks on strong technical backdrop, Barclays’s strategists Brad Rogoff and Dominique Toublan wrote this morning. The rally has been helped by a combination of higher yields and lower tail risk expectations, they wrote.
  • The primary market priced more than $4b this week as borrowers took advantage of the risk-on sentiment.

 

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.

19 May 2023
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(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.

19 May 2023
Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Investment grade credit spreads drifted wider through the first half of the week and into Wednesday’s close on the back of new issue supply.  Spreads then snapped tighter Thursday afternoon on the hope that there could be a near term resolution to the debt ceiling.  After the move tighter, spreads were unchanged on the week –the Bloomberg US Corporate Bond Index closed at 145 on Thursday May 18 after having closed the week prior at the same level.  The market eagerly awaits comments and a Q&A session with Jerome Powell and Ben Bernanke at 11 a.m. Friday morning.  Rates across the board were higher this week, and yields are the highest they have been since early March.  The 10yr Treasury is trading at 3.69% as we go to print after closing the prior week at 3.46%.  Through Thursday, the Corporate Index had a YTD total return of +2.16%.

It was a relatively light week for economic data with no real surprises in retail sales data, housing starts or initial jobless claims.  As we mentioned previously, it seems that the possibility of a weekend agreement on the debt ceiling has been the catalyst for higher Treasury yields.  Fed Funds futures are currently pricing in a +31.6% chance of a hike at the June 14 meeting but there will be plenty of data points between now and then that could change that picture.  Big economic releases next week include GDP, personal spending/income and core PCE.

It was a big week for issuance with nearly $60bln in new supply with Pfizer leading the way as it printed an 8-part $31bln deal to fund its acquisition of Seagen.  The Pfizer deal was the 4th largest bond deal of all time and the largest deal since CVS priced $40bln to fund its acquisition of Aetna in March of 2018.  Pfizer was priced with attractive concessions to incent demand and all eight tranches of the deal are trading tighter than where they priced on Tuesday afternoon.

Also of note, Schwab printed $2.5bln of new debt this week which, in our view, indicates that investors have regained some comfort around the ability of the regional banking sector to persevere.  Issuance thus far in the month of May has not disappointed with $123bln in supply month to date.  Year to date supply is $584bln.  Next week, new issuance will likely be front-end loaded as the market has a 2pm early close on Friday ahead of the Memorial Day weekend.

According to Refinitiv Lipper, for the week ended May 17, investment-grade bond funds saw +$2.163bln of cash inflows.  This was the second consecutive inflow after funds collected +$1.43bln 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.

05 May 2023
Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Investment grade credit spreads moved wider throughout the week. The Bloomberg US Corporate Bond Index closed at 148 on Thursday May 4 after having closed the week prior at 136.  The 10yr Treasury yield was only a few basis points higher this week after having closed last Friday at 3.42%.  Through Thursday, the Corporate Index had a YTD total return of +3.92%.  Much of the softness in spreads this week can be traced to renewed fears about regional bank deposits and capitalization.  It didn’t help matters that TD and First Horizon agreed to terminate their $13bln merger on Thursday.  Midway through the trading day on Friday we are seeing a relief rally in financials which could lead the index to close tighter for the day.

There was a huge amount of data to analyze this week. The biggest event of the week was on Wednesday as the FOMC chose to raise its benchmark rate by +25bps, in line with expectations.  The Fed did not go as far as to say that this was the last hike of this cycle but it left open the possibility that it could be.  On Friday, we got a very solid labor report that won’t make the Fed’s job any easier.  The unemployment rate edged lower to 3.4% while the labor market added +253k jobs during the month of April relative to expectations of a jobs gain of just +185k.  There were also ISM services and manufacturing releases this week that indicated a strengthening economy during the month of April.  Overall, the data on the week was mixed, but it reinforced the “higher for longer” narrative that some prognosticators are predicting out of the FOMC.  Away from the U.S. we also got a +25bps policy rate increase by the ECB with signaling of further tightening to come.

The primary market got off to a strong start in what is expected to be a busy month of May.  Through Thursday, $28.35bln in new debt had priced.  This is an impressive figure considering the fact that spreads drifted wider throughout the week.  There are 2 deals pending on Friday totaling $1bln+ which will likely be enough to push the weekly total beyond $30bln.  Supply estimates next week are calling for another $30-$35bln in new debt.

According to Refinitiv Lipper, for the week ended 5/3/2023, investment-grade bond funds reported an inflow of +$0.322bln.

 

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. 

05 May 2023
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(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.

28 Apr 2023
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(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.

28 Apr 2023
Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Investment grade credit spreads were mostly unchanged for the second consecutive week with the spread on the index just slightly wider from where it started the week. The Bloomberg US Corporate Bond Index closed at 135 on Thursday April 27 after having closed the week prior at 133.  The 10yr Treasury yield trended lower throughout the week with the benchmark rate trading at 3.48% as we go to print relative to 3.57% at the close last Friday. Through Thursday the Corporate Index had a YTD total return of +3.7% while the S&P500 Index return was +8.3% and the Nasdaq Composite Index return was +16.3%.

It was a quiet week in that the Federal Reserve was in media blackout so there weren’t many speeches to parse but there was still plenty of economic data.  On Friday we got a PCE inflation print that showed that inflation remained a problem last month which will likely reinforce the case for a Fed rate hike next Wednesday.  Also on Friday morning, the spending numbers showed that consumers are starting to lose steam with the February spending number seeing a downward revision and the March number coming in flat.  There will be plenty of action next week starting with a FOMC rate decision on Wednesday.  The debt ceiling looms large and more frequent headlines will start to become a regular occurrence as we drift closer to the X date.

The primary market was reasonably active given that earnings season is in full swing.  $16.85bln in new debt priced this week which just eclipsed the high end of the $10-$15bln estimate.  There are no new deals in the queue this last day of April so new issuance will finish with a monthly total of just $66bln vs a $100bln estimate.  The big questions for May: will supply come to fruition and what will the impact be on credit spreads?  May is typically a seasonally busy month having averaged $135bln in new supply over the past 5 years.

According to Refinitiv Lipper, for the week ended 4/26/2023, investment-grade bond funds saw -$1.3bln of cash outflows.  This was the first reported outflow for investment grade since March.

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. 

21 Apr 2023
Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Investment grade credit spreads drifted sideways this week and if that trend holds then it looks likely that the index will finish the week unchanged.  The Bloomberg US Corporate Bond Index closed at 134 on Thursday April 20 after having closed the week prior at 134.  The 10yr Treasury traded in a narrow range this week and the yield is 3.55% as we go to print which is 4 basis points higher than its closing level last Friday.  Through Thursday the Corporate Index had a YTD total return of +3.93% while the S&P500 Index return was +8.1% and the Nasdaq Composite Index return was +15.5%.

This was the first week in a while where there wasn’t an economic data point that had a significant impact on spreads or rates.  Most of the data that was released this week was in-line with expectations, including housing starts and initial jobless claims.  The market firmly expects a +25bp rate hike at the May 3rd FOMC meeting.  Fed funds futures are currently pricing the probability of a hike at +92.4%, a 10% increase from last Friday. The Fed media blackout starts this Saturday and we welcome the 1.5 week reprieve from parsing every word from each of the 12 FOMC members.

The primary market had a busy week as issuers priced $28.85bln of new debt through Wednesday versus the high end of projections that called for just $15bln.  There was no issuance on Thursday or Friday.  Banks were expected to deliver this week and they did so in a big way with BofA and Morgan Stanley printing $8.5bln and $7.5bln, respectively.  BNY Mellon and Wells Fargo also tapped the market.  Although this week was strong, April as a whole has been underwhelming with just under $49bln of new debt being priced thus far relative to projections that were calling for more than $100bln at the beginning of the month.  Forecasts are calling for $10-$15 billion of issuance next week, so it looks unlikely that we will approach that $100bln monthly figure with just 5 trading days remaining.

According to Refinitiv Lipper, for the week ended 4/19/2023, Investment-grade bond funds collected +$1.14bln of cash inflows.

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. 

21 Apr 2023
High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(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.

 

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