Category: Insight

05 Nov 2021
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads inched tighter throughout the week.  The OAS on the Blomberg Barclays Corporate Index closed at 86 on Friday, November 5, after having closed the week prior at 88.  On Wednesday, in a move that was widely anticipated, the Federal Reserve proceeded with the implementation of its plan to gradually taper the pace of asset purchases. Treasury yields moved lower after the FOMC meeting with the yield on the 10yr Treasury finishing the week at 1.45%, 10 basis points lower from its close the week prior.  Even a solid payrolls report with an upward revision to prior data was not enough to stem the rally in rates.  Through Friday, the Corporate Index had posted a year-to-date total return of -0.14% and an excess return over the same time period of +2.06%.

The primary market saw another somewhat active week with $20bln in new debt having been brought to market.   According to data compiled by Bloomberg, $1,258bln of new debt has been issued year-to-date.

Per data compiled by Wells Fargo, outflows from investment grade credit for the week of October 28–November 3 were -$0.280bln which brings the year-to-date total to +$313bln.  This marked the first outflow since March and only the second recorded outflow in the past calendar year.

22 Oct 2021
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.1 billion and year to date flows stand at -$2.2 billion.  New issuance for the week was $12.7 billion and year to date issuance is at $417.2 billion.

 (Bloomberg)  High Yield Market Highlights

  • The riskiest part of the junk bond market is poised to post gains for the second consecutive week.  Should the current trend hold, CCCs will close the week as the best performing asset in high yield amid rate volatility and inflation anxiety.
  • The broader junk bond index may also end the week with modest gains for the second straight week, with 0.04% largely propelled by CCCs.
  • While risk assets managed to tune out macro concerns, “continued rate volatility could be a potential source of risk for valuations and at least create opportunities within credit”, Barclays strategist Brad Rogoff wrote on Friday.
  • U.S. junk bond yields have come under pressure and have jumped 34bps since August to close at 4.18%; CCC yields rose 38bps to close at 6.53% as inflation fears took on momentum with the 5-year U.S. Treasury yields rising about 46bps in that period to close at a 20-month high of 1.243%.
  • Investors assessed rising yields and falling prices, re-entering the market to pour cash into retail funds.
  • U.S. high yield funds report an inflow of $2.1b this week, the biggest since April.
  • The primary market remained healthy with $12.7b of issuance.


(Bloomberg)  Fed’s Quarles Urges November Taper and Warns of Inflation Risks

  •  Federal Reserve Governor Randal Quarles said he favors an initial move to slow monetary stimulus next month and is concerned by a broadening of inflationary pressures that could require a policy response.
  • “I would support a decision at our November meeting to start reducing these purchases,” he said in remarks prepared for a speech Wednesday to a Milken Institute conference in Los Angeles, referring to the central bank’s bond-buying program, which is currently running at $120 billion a month.
  • Fed officials are getting ready to begin winding down the bond-buying program they put in place last year in the early days of the pandemic. They broadly agreed to start the process in either mid-November or mid-December, according to minutes of their last meeting on Sept. 21-22.
  • Quarles said he agreed that current high inflation is “transitory,” and that the central bank is not “behind the curve” with its monetary policy. While price moves have been prompted by supply disruptions during the Covid-19 pandemic, the surges have lasted longer than expected and there has been a broadening of the number of items that have seen price surges, he said.
  • “There is evidence in the past couple of months that a broader range of prices are beginning to increase at moderate rates, and I am closely watching those developments,” he said.
  • Quarles’ prepared remarks didn’t give an explicit forecast for the timing of interest-rate liftoff. Projections published at the conclusion of the Fed’s September meeting showed officials were evenly split on whether increases in its benchmark interest rate, which is currently near zero, would be necessary next year.
  • During a question and answer session, he said that “if we are still seeing 4% inflation or in that area next spring, then I think we might have to reassess the speed with which we would be thinking about raising interest rates.”
  • Quarles’ position as Fed vice chairman of supervision expired earlier this month and the Fed Board in Washington decided not to have any single governor take that position while awaiting a fresh nomination by President Joe Biden.
15 Oct 2021
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.2 billion and year to date flows stand at -$3.0 billion.  New issuance for the week was $5.2 billion and year to date issuance is at $404.4 billion.

(Bloomberg)  High Yield Market Highlights

  • Junk bonds bounced back from a recent dip, taking a cue from equities, to post the biggest one-day gains in seven and yields saw the biggest decline in almost five weeks, ending the day at 4.19%.
  • The junk bond index is poised to snap its three-week losing streak and post the biggest gains since mid-September, with week-to-date returns of 0.11%
  • Gains were across the board as oil prices closed at a seven-year high of $81.31 on Thursday.
  • Primary market resilience was evident as issuance continued at a steady pace.
  • US. junk-bond investors, while continuing their search for yield, were demanding appropriate risk premium.
  • Amid broader resilience, investors are growing cautious amid concerns about increasing volatility. That was evident in the lack of interest as debt-laden alarm company Monitronics International struggles to find enough buyers for its $1.1b 7-year notes, the inaugural bond offering since emerging from bankruptcy two years ago.
  • These were slated to price earlier in the week.
  • Investors also pulled cash from retail funds, with an outflow of $1.2b from U.S. high yield funds, the biggest since mid-June.
  • The broader junk bond index spreads dropped 6bps to +295bps and posted gains of 0.29% on Thursday, the biggest one-day returns since March.
  • Single B yields also dropped 12bps to close at 4.60%, the biggest decline in six weeks, and the index posted gains of 0.29%, also the biggest since March.


(CNBC)  Fed says it could begin ‘gradual tapering process’ by mid-November

  • Federal Reserve officials could begin reducing the extraordinary help they’ve been providing to the economy by as soon as mid-November, according to minutes from the central bank’s September meeting released Wednesday.
  • The meeting summary indicated members feel the Fed has come close to reaching its economic goals and soon could begin normalizing policy by reducing the pace of its monthly asset purchases.
  • In a process known as tapering, the Fed would reduce the $120 billion a month in bond buys slowly. The minutes indicated the central bank probably would start by cutting $10 billion a month in Treasurys and $5 billion a month in mortgage-backed securities. The Fed is currently buying at least $80 billion in Treasurys and $40 billion in MBS.
  • The target date to end the purchases should there be no disruptions would be mid-2022.
  • The minutes noted “participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate.”
  • “Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December,” the summary said.
  • St. Louis Fed President James Bullard told CNBC on Tuesdaythat he thinks tapering should be more aggressive in case the Fed needs to rate interest rates next year to combat persistent inflation.
  • At the September policymaking session, the committee voted unanimously to hold the central bank’s benchmark short-term borrowing rate at zero to 0.25%.
  • The committee also released the summary of its economic expectations, including projections for GDP growth, inflation and unemployment. Members scaled back their GDP estimates for this year but upped their outlook for inflation, and indicated they expect unemployment to be lower than earlier estimates.
  • In the “dot plot” of individual members’ expectations for interest rates, the committee indicated it could begin raising interest rates as soon as 2022. Markets currently are pricing in the first rate hike for next September, according to the CME FedWatch tool. Following the release of the minutes, traders increased the likelihood of a September hike to 65% from 62%.
  • Officials, though, stressed that a tapering decision should not be seen as implying pending interest rate hikes.
  • However, some members at the meeting showed concern that current inflation pressures might last longer than they had anticipated. Traders are pricing in a 46% chance of two rate hikes in 2022.
  • “Most participants saw inflation risks as weighted to the upside because of concerns that supply disruptions and labor shortages might last longer and might have larger or more persistent effects on prices and wages than they currently assumed,” the minutes stated.
  • The document noted that “a few participants” said there could be some “downside risks” for inflation as long-standing factors that have kept prices in check come back into play. The majority of Fed officials have been holding to theme that the current price increases are transitory and due to supply chain bottlenecks, and other factors likely to subside.
  • Inflation pressures have continued, though, with a reading Wednesday showing that consumer prices are up 5.4% over the past year, the fastest pace in decades.
15 Oct 2021
Insight, Investment Grade Quarterly Josh Adams - Portfolio Manager 0 comment

2021 Q3 Investment Grade Quarterly

Investment grade corporate credit finished the third quarter little changed from where it began the period. The option adjusted spread (OAS) on the Bloomberg Barclays US Corporate Bond Index ended the third quarter at 84 just modestly wider from where it started at a spread of 80.

Treasuries finished the quarter nearly unchanged as well. The 10yr Treasury opened the 3rd quarter at 1.47% and closed at 1.49%. There was some volatility along the way, as the benchmark rate closed as low as 1.17% near the beginning of August with much of its move higher coming in the last week of September.

It has been a relatively low volatility year for investment grade credit spreads with the Corporate Index having traded so far this year within its narrowest band since 2006, with a spread range of just 20 basis points. The index saw its tightest level when it closed at 80 the last day of June and its widest level of 100 in early March. For context, during the volatile year of 2020, the index saw a range of 280 basis points. The index traded in a range of 64 and 68 basis points in 2019 and 2020, respectively.

There are several reasons why we believe volatility has been subdued thus far in 2021. First, demand for investment grade credit as an asset class has been very strong which can be supportive of lower volatility and tighter credit spreads. According to data compiled by Wells Fargo Securities, there has been over $300bln in fund flows into investment grade credit through September 29.i A second reason we believe there has been less volatility is due to low net new issue supply. Gross supply has exceeded $1.1 trillion in 2021, the second busiest year on record.ii However, a closer examination of the numbers reveals that much of 2021’s supply has been for the replacement of existing higher cost debt. After subtracting tenders, refinancing and maturities, that $1.1 trillion gross supply figure gets whittled down to less than $300bln in net new issue supply through the end of the third quarter.iii Simply put, demand for credit has overwhelmed available supply. Finally, investment grade companies have strong balance sheets and high cash balances. Combining this strength with a yield starved environment and a “risk-on” sentiment has created a feeling among some investors that there is very little risk at the moment in IG credit and we believe this is the largest factor that has contributed to low volatility

Although most companies in IG credit are well positioned, this is an environment where investors need to tread especially lightly and do their homework on each individual company. Yes IG credit is generally in good or even great condition. Many companies issued debt during the worst of the pandemic because they wanted to shore up liquidity in the face of uncertainty. As a result, gross leverage is still elevated from pre-pandemic levels. Much of the cash that was borrowed is sitting idle on company balance sheets. As an additional consequence of the pandemic, there are scores of companies that paused share buybacks in 2020 or even dividends and have yet to resume them. There will be pressure from shareholders to resume these activities as well as additional shareholder remuneration. Management teams and boards have stockpiles of cash and may be tempted by ample M&A opportunities at some of the richest valuations the market has ever seen. It is important for a bond manager to identify those companies that are committed to maintaining or repairing the health of their balance sheets and to avoid those that will use excess liquidity for pursuits that are negative for bondholders. Shareholder rewards and M&A are fine as long as they are done within the confines of the balance sheet. It is when these activities rise to excess levels resulting in downgrades from A to BAA or from BAA to junk that it starts to impair total return potential for bondholders.

In a move that was largely expected at its September meeting the Federal Reserve said that it could start to reduce its $120 billion in monthly asset purchases as soon as its next scheduled meeting in early November. The tapering messaging has been deliberate and carefully crafted, and although there has not yet been a formal decision, Chairman Powell said that it would be a gradual process “that concludes around the middle of next year is likely to be appropriate.”iv
It has received much less press coverage but we would argue that the Fed began the tapering process back in July when it started selling down its corporate credit facilities. Recall that during the height of the crisis in March of 2020, the Fed went to extraordinary measures and began to purchase corporate bond ETFs as well as individual corporate bonds. The maximum size of the facility was $750bln, but at its peak the facility only grew to $14bln. The Fed quietly exited all of these positions by September 1 with no discernible market impact.v Clearly, the program was a success and it did much to reinstall confidence in the credit markets at a time when it was desperately needed.
As far as the federal funds rate is concerned, the September meeting was slightly more hawkish than expectations but again the message was clear that tapering will come first and any rate hikes will come thereafter. The committee was split on the timing of the first rate hike, with half of 18 Fed officials expecting at least one increase by the end of 2022 with additional increases forthcoming during 2023. We also expect that this will be a slow and steady process. The Fed Funds rate is a very short term interest rate and its impact is limited to the front end of the yield curve, while maturities further out the curve, like the 10yr and 30yr Treasury are much more impacted by the overall direction of the economy and inflation expectations. We think incremental increases in the Fed Funds rate are entirely manageable for corporate credit so long as the Fed keeps a watchful eye on the economy to prevent it from overheating.

We often receive questions from clients about our intermediate positioning, as our portfolios are typically invested in bonds that range from 5-10 years until maturity. A bond portfolio is generally seeking to accomplish four goals: income generation, preservation of capital, inflation protection and diversification. We believe positioning the portfolio within an intermediate maturity range helps to accomplish all of these goals but it is especially useful in limiting downside and preserving purchasing power. Intermediate maturities give the portfolio a chance to benefit if Treasury rates go lower but it also provides much more protection from rising interest rates than if the portfolio were invested in longer maturities 20 to 30 years out the curve. More importantly, it gives the portfolio a chance to generate a positive total return in environments where rates exhibit little movement, even if absolute yields are low like they are currently. The 5/10 curve is one of the most reliably steep portions of both the Treasury curve and the corporate credit curve, which is the spread that one is afforded for owning a corporate bond on top of a Treasury.

As you can see from the chart, the steepness afforded from the 5/10 portion of these curves is attractive relative to the longer portions. Take the corporate yield curve as an example (green). We get 91 basis points of additional yield by selling a bond at 5yrs and using the proceeds to buy a bond that matures in 10yrs. The way that bond math works, all else being equal, in a static rate and spread environment, we would collect 91 basis points of roll down from holding a generic investment grade corporate bond from 10yrs selling it at 5yrs. The mere 68 basis points of compensation afforded from extending from 10yrs to 30yrs pales in comparison to the intermediate positioning. The extension from 10/30 is also accompanied by substantially more interest rate risk.

Now let’s take a look at duration to provide some more context to this discussion. At September 30 2021, the modified duration of the Bloomberg Barclays US Corporate 5-10yr index was 6.47 and the OAS was 80. The modified duration of the US Corporate 10+yr index was 15.19 and the OAS was 122. One very basic measure of risk/reward we like to use is yield per unit of duration. In this instance we are receiving 12.4 basis points per year of duration if we invest in the 5-10yr index but only 8 basis points per year of duration if we invest in the 10+ portion of the index. Given the way that we at CAM view the world, by investing in the 10+ year portion of the index, we would be receiving significantly less compensation in exchange for more interest rate risk.

The big themes that will carry us into year-end are the ongoing pandemic, the domestic economy, China and the FOMC; on these topics there are more questions than answers at this point. Will the economy continue to recover or will new variants take the wind out of its sails? Will policy makers be able to offer targeted relief to those sectors of the economy that have not come close to recovering lost earnings without offering relief that is so broad that it leads to overheating? Will problems with China’s domestic economy lead to systemic issues for the global economy – for the record we think not –but could there be ramifications for certain industries? And finally, the FOMC’s November meeting looms large with the potential for an announcement on tapering asset purchases.
As we stated earlier in this missive, corporate credit is generally in solid shape but this is not a risk free asset class. Mistakes will be made by some management teams that become too aggressive amid an environment that is still rife with uncertainty and it is our job to do our best to avoid those issues for our client portfolios. We are still positioning our portfolio in a more defensive manner than the market as a whole and we do not see that changing in the near term. Please feel free to contact us with any comments, questions or concerns. Thank you for your business and continued interest.

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. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

i Wells Fargo Securities, September 30 2021 “Credit Flows | Supply & Demand: 9/23-9/29”
ii Bloomberg, September 30 2021 “IG ANALYSIS: CNO FABN Debut Leads Docket; $90-$100bn October”
iii Credit Suisse, September 13 2021 “CS Credit Strategy Daily Comment”
iv The Wall Street Journal, September 22 2021 “Fed Tees Up taper and Signals Rate Rises Possible Next Year”
v Federal Reserve Statistical Release, September 2 2021 “H. 4. 1 statistical release”

15 Oct 2021
High Yield Quarterly, Insight Rich Balestra - Portfolio Manager 0 comment

2021 Q3 High Yield Quarterly

In the third quarter of 2021, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 0.89% bringing the year to date (“YTD”) return to 4.53%. The CAM High Yield Composite net of fees total return was 1.10% bringing the YTD net of fees return to 3.56%. The S&P 500 stock index return was 0.58% (including dividends reinvested) for Q3, and the YTD return stands at 15.91%.

The 10 year US Treasury rate (“10 year”) had a move down to a 1.17% low in early August and then moved back up to finish at 1.49%, up 0.02% from the beginning of the quarter. Over the period, the Index option adjusted spread (“OAS”) widened 21 basis points moving from 268 basis points to 289 basis points. Each quality segment of the High Yield Market participated in the spread widening as BB rated securities widened 3 basis points, B rated securities widened 33 basis points, and CCC rated securities widened 62 basis points. Take a look at the chart below from Bloomberg to see a visual of the spread moves in the Index over the past five years. The graph illustrates the speed of the spread move in both directions during 2020 and the continuation of lower spreads in 2021. The OAS record low (not shown) is 233 basis points set back in 2007.

The Energy, REITs, and Other Financial sectors were the best performers during the quarter, posting returns of 1.70%, 1.22%, and 1.17%, respectively. On the other hand, Finance Companies, Consumer Cyclicals, and Communications were the worst performing sectors, posting returns of 0.44%, 0.56%, and 0.56%, respectively. Clearly the market was strong as no sector posted a negative return in the period. At the industry level, life insurance, independent energy, restaurants, and paper all posted the best returns. The life insurance industry posted the highest return 3.43%. The lowest performing industries during the quarter were refining, gaming, cable, and health insurance. The refining industry posted the lowest return -0.63%.

The energy sector performance has continued to remain strong. While crude oil held its own averaging $70 per barrel in Q3, the natural gas market has moved steadily higher. The acceleration to the upside is a function of both supply and demand being impacted. Excessive summer heat particularly in the northwest called for higher than normal power demand. This left a situation of below average gas storage. Then hurricane Ida resulted in knocking much of the Gulf of Mexico production offline. In fact, over 75% of the production is still shut-in. The icing on this story is that traders are beginning to look towards the possibility of a colder than normal winter. If that situation comes to be more priced in as consensus, this price train will just keep chugging higher.

During the third quarter, the high yield primary market continued its record pace and posted $115.9 billion in issuance. Many companies continued to take advantage of the open new issue market that is offering very attractive financing. Year to date there has been $433 billion in issuance and will no doubt set a new record by topping last year’s $442 billion. The issuance in Consumer Discretionary continued to be very strong with approximately 22% of the total during the quarter. Financials issuance was best for second place by making up 17% of the total new paper placed in the market.

The Federal Reserve maintained the Target Rate to an upper bound of 0.25% at both the July and September meetings. The chart to the left shows the updated Fed dot plot post the September meeting. Also, the market is currently pricing in one rate hike by year end 2022.i As expected, the Fed signaled that the time to taper is at hand with Chair Powell commenting that tapering “could come as soon as the next meeting.” He further noted that the taper is separate and distinct from rate hikes by saying “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest-rate liftoff.”ii The transitory nature of red hot inflation is very much a front and center concern with supply chain issues being particularly troubling. Recently, on a panel including several central bankers from across the globe, Powell said “it is also frustrating to see the bottlenecks and supply chain problems not getting better — in fact, at the margin, apparently getting a little bit worse. We see that continuing into next year, probably, and holding inflation up longer than we had thought.”iii On October 1st, the personal consumption expenditures report was released. This is a price gauge that the Fed uses for its inflation target. The report showed the largest increase in 30 years.

Intermediate Treasuries increased 2 basis points over the quarter, as the 10-year Treasury yield was at 1.47% on June 30th, and 1.49% at the end of the third quarter. The 5-year Treasury increased 8 basis points over the quarter, moving from 0.89% on June 30th, to 0.97% at the end of the third quarter. Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the Target Rate. The revised second quarter GDP print was 6.7% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2022 around 4.1% with inflation expectations around 2.5%.iv

Being a more conservative asset manager, Cincinnati Asset Management Inc. does not buy CCC and lower rated securities. This policy generally served our clients well in 2020. However, the lowest rated segment of the market has outperformed year to date in 2021. Thus, our higher quality orientation was not optimal during the first half of the year, but it was once again a benefit during Q3. As a result and noted above, our High Yield Composite gross total return has underperformed the Index YTD. However, our Composite did outperform over the third quarter measurement period. With the market staying strong during the third quarter, our cash position remained a drag on overall performance. Outside of that, credit selection drove much of the story in Q3. The downside was driven by selections in the consumer cyclical services and wirelines industries while the top positive offsets were found within aerospace/defense, autos, and transportation

The Bloomberg Barclays US Corporate High Yield Index ended the third quarter with a yield of 4.04%. The market yield is an average that is barbelled by the CCC-rated cohort yielding 6.26% and a BB rated slice yielding 3.18%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), had an average of 18 over the quarter. For context, the average was 15 over the course of 2019 and 29 for 2020. The third quarter had zero bond issuers default on their debt. The trailing twelve month default rate fell to 0.92% with the energy sector accounting for about a third of that rate.<sup>v</sup> The current 0.92% default rate is relative to the 5.80%, 6.17%, 4.80%, 1.63% default rates for the third and fourth quarters of 2020, and the first and second quarters of 2021 respectively. Pre-Covid, fundamentals of high yield companies had been mostly good and in the aggregate fundamentals are back to those pre-covid levels. From a technical view, fund flows were roughly flat in July, positive in August and September, and the year-to-date outflow stands at $1.3 billion.<sup>vi</sup> In spite of this outflow, a strong bid remains in the market for high yield paper, and the declining default rate is keeping a risk on attitude in place for market participants. We are of the belief that for clients that have an investment horizon over a complete market cycle, high yield deserves to be considered as part of the portfolio allocation.

It is quite interesting to think through just how much has transpired over the last year and a half. The US has spent trillions in response to the covid pandemic providing support to people and companies impacted. The vaccine has been rolled out and according to the CDC, 77% of the US population ages 18+ has received at least one shot. This is up from 55% at the time of our Q2 commentary and 32% as of our Q1 commentary. As a country, we are currently in a place where the economy is booming and inflation is escalated. The Federal Reserve has signaled that they will begin the taper of asset purchases in short order. Moving from Q3 into Q4, Congress is wrangling with funding to avoid a shutdown, raising the debt ceiling, passing an infrastructure bill, and passing a fresh social programs spending bill that will have a price tag in the trillions of dollars. There is certainly no slowdown of information flow as we move into the last quarter of 2021. Clearly, it is important that we exercise discipline and selectivity in our credit choices moving forward. We are very much on the lookout for any pitfalls as well as opportunities for our clients. We will continue to carefully monitor the market to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis. As always, we will continue our search for value and adjust positions as we uncover compelling situations. Finally, we are very grateful for the trust placed in our team to manage your capital through such a historic 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. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

i Bloomberg September 30, 2021: WIRP – World Interest Rate Probability
ii Bloomberg September 22, 2021: Powell Says Fed Taper Could Start ‘Soon’
iii The New York Times September 29, 2021: The World’s Top Central Bankers See Supply Chain Problems Prolonging Inflation
iv Bloomberg October 1, 2021: Economic Forecasts (ECFC)
v JP Morgan October 1,, 2021: “Default Monitor”
vi Wells Fargo October 1, 2021: “Credit Flows”

08 Oct 2021
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads look to finish the week unchanged as Treasury yields inch higher.  The OAS on the Blomberg Barclays Corporate Index closed at 85 on Thursday October 7 after having closed the week prior at 84 but the market is trading tighter as we go to print mid-morning on Friday October 8.  Treasury yields have moved higher with each passing day throughout the week with the yield on the 10yr Treasury now above 1.6%, 14 basis points higher than where it finished the previous week.  Some of the move higher can be attributed to the payroll report on Friday morning, with early market commentary seeming to indicate it was “just barely okay enough” for tapering to begin as soon as the Fed meets in November.  However, it is worth noting that this was a big miss as payrolls increased by just 194,000 in September versus the 500,000 estimate – the smallest payroll gain thus far in 2021.  Through Thursday, the Corporate Index had posted a year-to-date total return of -1.67% and an excess return over the same time period of +1.82%.

 

 

The primary market saw good activity during the week with $27.6bln in new bonds having been brought to market.   Activity is likely to slow as earnings season begins and estimates are calling for around $15bln next week.  According to data compiled by Bloomberg, $1,149bln of new debt has been issued year-to-date.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of September 30–October 6 were +$804mm which brings the year-to-date total to +$305bln.

08 Oct 2021
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$1.8 billion.  New issuance for the week was $15.1 billion and year to date issuance is at $399.1 billion. 

(Bloomberg)  High Yield Market Highlights 

  • The U.S. junk-bond market posted gains on Thursday, ending a three-day run of losses, and yields fell amid an onslaught of issuance.
  • “Despite a recent pull back in valuations, the high-yield market remains relatively compressed. With dispersion at low levels, investors are finding it increasingly difficult to find opportunities in the secondary market,” Barclays strategist Brad Rogoff wrote in note on Friday.
  • The primary market is crowded with debut issuers, companies borrowing after emerging from bankruptcy and LBOs.
  • Amid reports of inflationary pressures, with the 5-year U.S. Treasury yield climbing to a 19-month high of 1.02%, the U.S. junk-bond index came under some modest pressure as it is headed a loss for the third consecutive week.
  • Yields fell 5bps to close at 4.11% on Thursday and spreads closed at +293.
  • The riskiest slice of the junk bond market, CCCs, posted gains on Thursday, the biggest one-day returns in two weeks.
  • CCC yields dropped 12bps to 6.18%, a two-week low and the biggest one-day decline in three weeks.
  • Junk bonds may stall as U.S. equity futures drift as investors await for key employment report for clues on the Federal Reserve’s monetary policy.


(The Wall Street Journal)  Biden Backs Powell After Warren Intensifies Opposition 

  • President Biden said he has confidence in Federal Reserve Chairman Jerome Powell after Sen. Elizabeth Warren (D., Mass.) on Tuesday escalated her criticismof the central bank’s leader.
  • “Thus far, yes,” Mr. Biden said when asked by a reporter during a trip to Michigan if he had confidence in Mr. Powell. “But I’m just catching up to some of these assertions,” he said, referring to senior officials’ trading activitiesthat sparked Ms. Warren’s most recent volley of disapproval.
  • Biden gave no indication he has made a decision over whether to offer Mr. Powell a second term when his current one expires in February. Members of Mr. Biden’s economic team have supported keeping Mr. Powell. However, Ms. Warren’s vocal opposition has complicated Mr. Biden’s political calculus, as he tries to balance moderate and progressive demandson his signature domestic policy goals.
  • Several members of both parties have also voiced supportin recent weeks for Mr. Powell’s renomination, giving him high marks for his response to the pandemic. Some Democrats have been heartened by his public comments that recent inflationary pressures, because they are being driven by temporary supply-chain disruptions, don’t require an immediate policy response from the Fed.
  • But a vocal minority of Democrats, led by Ms. Warren, have called for his replacement and favor someone who would be more active in pressing the central bank to regulate banks and address climate-related risks. Ms. Warren last week told Mr. Powell at a hearing that his record favoring a lighter touch on banks made him a “dangerous man” to lead the Fed and that she would not support his nomination.
  • Powell is a Republican who was first nominated to the Fed’s board 10 years ago by President Obama. He was named as Fed chairman by President Trump in 2018.


(Bloomberg)  Senate Passes Short-Term Boost in Debt Limit 

  • The Senate approved legislation yesterday that pulls the nation from the brink of a first-ever payment default with a short-term debt-ceiling increase, breaking a weeks-long stalemate that rattled financial markets.
  • The vote was 50-48, with no Republicans in favor of the measure that simply kicks the can toward another precarious debt-limit fight in less than two months. The $480 billion increase in statutory borrowing would run out around Dec. 3.
  • The debt limit increase still needs a vote in the House. House Majority Leader Steny Hoyer (D-Md.) said last night the chamber will vote on the measure on Tuesday. It’s expected to pass there, and the White House said President Joe Biden looked forward to signing into law.
  • Schumer and Minority Leader Mitch McConnell (R-Ky.) struck a deal for the legislation earlier yesterday. The timeline sets up a collision course where various fiscal and policy battles will play out roughly simultaneously.
  • Funding for government operations also expires on Dec. 3, risking a government shutdown unless lawmakers can complete agency budgets for this fiscal year. Also, Democrats could be trying to push through Biden’s broad economic package around that time.
  • Leading up to December, Republicans will again push Democrats to raise the debt ceiling on their own through the budget reconciliation process—unless Democrats agree to drop their up-to-$3.5 trillion social tax and spending bill, a cornerstone of Biden’s legislative agenda. Democrats have agreed to push back the deadline to December, but haven’t agreed to act the next time through reconciliation.
  • That gives Democrats roughly eight weeks, if they choose to pursue the complex process they sought to avoid, to push a measure through equally-divided Senate committees and allow a lengthy series of floor votes sought by Republicans.
17 Sep 2021
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at -$2.0 billion.  New issuance for the week was $12.7 billion and year to date issuance is at $363.5 billion.

 (Bloomberg)  High Yield Market Highlights 

  • The riskiest segment of the market, CCCs, is poised to end the week as the best performing asset class, with gains of 0.33%, fueled by rising oil prices.
  • The broader junk bond index is also set to post gains for fourth consecutive week, with returns of 0.16%
  • Junk bond yields are still hovering well below 4%, closing at 3.76% on Thursday, just 23bps away from the all-time low of 3.53%
  • It felt like the calm after a storm in the primary market with no new issues pricing or launching a roadshow on Thursday, after almost $13b priced, including the debut note sale of cryptocurrency trading platform Coinbase Global
  • The junk bond calendar is steadily building up as investors make room for Medline Industries, the biggest leveraged buyout since the global financial crisis
  • More borrowers are expected to tap the market as yields continue to drop and spreads tighten in the high yield market
  • BB yields closed at 2.88%, just 2bps above the record low of 2.86%
  • Spreads were at a 19-month low of +190bps
  • Single B yields closed at 4.19%, down 1bp, and spreads tightened 4bps to +314bps
  • U.S. equity futures slid and European stocks reversed gains as investors evaluated the resilience of the global economic recovery amid concerns from the Delta strain and risks from China.  Traders are waiting for August retail sales numbers, after China’s disappointing data yesterday, for cues on Federal Reserve’s taper plans. Meanwhile, oil is headed for a fourth weekly gain supported by signs of a tighter market and wider rally in energy prices.


(Bloomberg)  Gensler Turns Spotlight on Bond Prices 

  • After U.S. Securities and Exchange Commission Chairman Gary Gensler signaled he may overhaul bond market regulations, industry experts zeroed in on just how opaque trading can be.
  • Gensler, who testified Sept. 14 before the Senate Banking Committee, said in prepared remarks released beforehand that he wants to “bring greater efficiency and transparency” to the trading of corporate bonds, municipal bonds and mortgage-backed securities. He offered little detail on what new rules might look like.
  • Market watchers have suggestions, a year after a liquidity breakdown early in the pandemic forced the Federal Reserve to backstop the bond market. A big source of angst: especially when compared with other key financial assets like stocks, it can take a lot more effort to figure out the price of a bond.
  • “Pre-trade transparency is a focus,” said Kumar Venkataraman, a finance professor at Southern Methodist University and former member of the SEC’s Fixed Income Market Structure Advisory Committee. “If you’re a large, sophisticated investor, you receive quotes from many dealers and see the best price. If you’re less sophisticated, you might get a less competitive bid.”
  • Currently, corporate bond trades must be reported to the Financial Industry Regulatory Authority’s Trace system no more than 15 minutes after they’re executed — a deadline that feels like an eternity in the era when stock and futures traders fret about microseconds.
  • And before trades are placed, there are no publicly available price quotes. To get those can require making phone calls or sending electronic requests for quotes to a bunch of banks and brokers.
  • A potential solution would require bond brokers to report their offered prices to a centralized system, which is how it’s worked in the U.S. stock market since the 1970s. That could make the business more efficient by stitching together all the different markets where bonds trade. In stocks, for instance, all orders are supposed to be automatically routed to the market with the best price.
  • Sell-side banks have little incentive to provide greater transparency, since it could cut into their profits. And reporting quotes could be a costly and time-consuming process that banks currently have little interest in participating in, Venkataraman said.
  • Don’t expect corporate bonds to begin trading in a centralized system like equities anytime soon, says Kevin McPartland, head of research for market structure at Coalition Greenwich.
  • “The bond market is still very different from the equity market in terms of how it trades and in terms of the market participants,” he said. “Bond markets are by and large institutional markets. So we have a very informed consumer if you will.”
  • The bond-market crisis of March and April 2020 is fresh in regulators’ minds. Government officials appear to view the unprecedented steps taken by the Fed in March 2020 as a mandate to address long-standing concerns that bond liquidity disappears in bad times.
  • Gensler has targeted market transparency before. The opacity of the swaps market was one of the reasons why the 2008 financial crisis was so severe, since it was extremely difficult to untangle the connections between Wall Street banks who held the derivatives. Gensler, as chairman of the U.S. Commodity Futures Trading Commission, oversaw a push to get more of that business done on public markets.
27 Aug 2021
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads are set to finish the week tighter, reclaiming the move wider that occurred the week prior.  The OAS on the Blomberg Barclays Corporate Index closed Thursday August 26 at a spread of 88 after having closed last week at 91 –spreads are relatively unchanged as we go to print on Friday afternoon.  The yield on the 10yr Treasury moved higher throughout the week and is trading at 1.31% at the moment, 6 basis points higher than it closed the previous week.  Through Thursday, the Corporate Index had posted a year-to-date total return of -0.55% and an excess return over the same time period of +1.46%.

It was a very slow week for corporate issuance with just $3bln in volume.  This is quite typical for this time of year and we expect more of the same next week before the spigot gets turned back on after the Labor Day holiday. According to data compiled by Bloomberg, $962bln of new debt has been issued year-to-date.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of August 19–25 were +$5.9bln which brings the year-to-date total to +$270bln.

27 Aug 2021
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$5.2 billion.  New issuance for the week was $1.4 billion and year to date issuance is at $350.4 billion.

 (Bloomberg)  High Yield Market Highlights 

  • The riskiest part of the junk bond market is on track to post the first weekly gains in seven weeks and the biggest in six months.  With the primary market at a virtual standstill, CCC yields may see the biggest weekly decline in almost three months as investors steadily reposition themselves following a brief sell-off.
  • The broader U.S. junk bond index is poised to end three weeks of declines, and is on track to post the biggest weekly gains in more than two months
  • The index yields may see the first weekly drop in seven weeks
  • The CCC index gained on Thursday for the fifth straight session, with returns of 0.1%. The week-to-date returns stood at 0.62%, the biggest since February 5th
  • Yields dropped 5bps to close at 6.42% yesterday and the week-to-date drop is 23bps
  • Should the trend hold, it is likely to see the biggest weekly decline since May 28
  • The overall index yield was unchanged on Thursday while it fell 15bps week-to-date, to make it the biggest in eight weeks
  • The primary market is expected to resume business after the Labor Day holiday as the pipeline is expected to be jammed with buyout financings
  • U.S. equity futures advanced and European stocks remained steady ahead of Chair Powell’s speech at the Jackson Hole symposium later today to see if he offers any clues about the timeline for tapering bond purchases. Oil, meanwhile, is headed of the biggest weekly gain in 11 months as focus shifted to the storm that menacing the Gulf of Mexico


(Bloomberg)  S&P Sees Junk Bond Defaults Vanishing Amid Recovery, Easy Money 

  • Missed debt payments by junk-rated borrowers look set to become increasingly rare amid cheap borrowing conditions and economic recovery, according to S&P Global Ratings.
  • The U.S. speculative-grade corporate default rate could fall to as low as 2% by the middle of next year on a trailing 12-month basis, from 3.8% this June, according to a report by S&P. That’s the optimistic scenario, which would be the lowest level of defaults since 2015. It compares to a 2.5% baseline and 5.5% pessimistic forecast for June 2022 by S&P.
  • The junk bond default rate peaked at 6.7% in December — the highest since 2010 — after lockdowns caused by the pandemic. Most borrowers are now able to cover debt payments amid favorable lending and better operating conditions, according to the S&P analysts led by Nick Kraemer, head of ratings performance analytics.
  • In the second quarter, there were only 11 defaults, the fewest since the third quarter of 2018. The number of speculative-grade upgrades outpaced downgrades by about 3-to-1 in 2021, according to the report published Aug. 20.
  • The delta variant could test borrowers, especially in sectors hit hardest by Covid-19, like entertainment and travel. Energy, consumer and service companies — which led the second quarter with the most defaults — are also at risk, though they are expected to broadly recover in 2022.


(The Wall Street Journal)  Western Digital in Advanced Talks to Merge With Kioxia

  • Western Digital is in advanced talks to merge with Japan’s Kioxia Holdings Corp., according to people familiar with the matter.
  • Long-running discussions between the companies have heated up in the past few weeks and they could reach agreement on a deal as early as mid-September, the people said. Western Digital would pay for the deal with stock and the combined company would likely be run by its Chief Executive, David Goeckeler, the people said.
  • There’s no guarantee Western Digital, which had a market value of around $19 billion Wednesday afternoon, will seal an agreement, and Kioxia could still opt for an initial public offering it had been planning or another combination.
  • The Wall Street Journal reported in March that Western Digital and Micron Technology were examining potential deals with Kioxia, which makes NAND flash-memory chips used in smartphones, computer servers and other devices. Micron’s interest has since cooled and Kioxia has been focused on discussions with Western Digital, which already has deep existing ties with the Japanese company.
  • Western Digital, which makes hard disk drives, solid-state drives and NAND chips, has a joint venture with Kioxia for manufacturing and research and development that was set to expire starting in 2027. That agreement appears to have given Western Digital a leg up on Micron, and their existing ties could help make a WD-Kioxia combination more palatable to regulators.
  • Kioxia, formerly part of Toshiba and known as Toshiba Memory, was purchased in 2018 by a group led by private-equity firm Bain Capital.
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