Insight – Page 2 – Cincinnati Asset Management

18 Oct 2024

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 for a first weekly gain in three, propelled by CCCs, the riskiest part of the high-yield market, after strong economic data underlined the resilience of the economy.
A string of recent reports showed robust retail sales, expanding services activity and a strong jobs market, easing concerns of a recession that would lead to a strong of corporate defaults.
CCCs are poised to record gains for the 16th consecutive week, the longest streak since March 2017. They rallied for five straight sessions this week, bucking the broader trend
CCC spreads dropped to 591 basis points, the lowest since February 2022. They tightened 21 basis points week-to-date and are on track for a seventh weekly decline
CCC yields plunged to 10.17%, the lowest since April 2022. They are down 18 basis points so far this week
BBs are also set to close the week with modest gains, the first in three weeks, though they posted small losses on Thursday after three-day rally
Single Bs are also headed for a first gain in three weeks
Credit markets traded well this week amid favorable supply-demand technicals and supportive macro data, Brad Rogoff and Dominique Toublan of Barclays wrote in a note Friday
The broad and steady rally amid a resilient economy and easing interest-rate policy spurred strong risk appetite, driving capital-market activity and moving October volume to almost $14b

14 Oct 2024

Insight, Investment Grade Quarterly CAM Team 0 comment

2024 Q3 Investment Grade Quarterly

Investment grade credit enjoyed solid performance during the third quarter as bondholders benefited from tighter credit spreads and lower Treasury yields. The Fed finally kicked things off with its much-anticipated easing cycle by lowering its policy rate for the first time since March 2020. We remain constructive on the investment grade bond market over the near and medium term.

The option-adjusted spread (OAS) on the Bloomberg US Corporate Bond Index opened the third quarter at 94 and traded as wide as 111 in early August before finishing the quarter at a spread of 89. August brought with it a few volatile trading days, something we had yet to experience in 2024. Weak manufacturing and employment data soured investor sentiment, and equity indices collapsed, which spilled over into credit spreads. The weakness in spreads was short-lived. The IG index closed as wide as 111 on August 5th before incrementally moving back to 100 on August 14th. From there, spreads continued to grind tighter into quarter-end.

Treasury yields moved meaningfully lower during the quarter, which was a tailwind for total returns. This was in contrast to the 2nd quarter, which saw rates move higher throughout. The front end of the yield curve was especially lower in the 3rd quarter, with the 2-year Treasury posting an inter-quarter move lower of -111 basis points. We view this rally in the front end of the curve as a classical response to the Fed’s cut, as short rates historically are typically much more impacted than rates further out the curve.

Investment-grade corporate issuance continued at its sizzling pace. Both July and September set historical records for the most volume ever brought to market in each of those months. $1.264 trillion of new investment-grade debt was issued through the third quarter, which was +29% ahead of 2023’s pace – and 2023 was no slouch. As we have written in previous notes, the 2024 new issue market has been in a goldilocks zone. IG-rated borrowers have been comfortable with the rates they are paying, and investors have been pleased with the compensation afforded. Fund flows have been soundly positive and supportive of investor demand, and new issue concessions have been reasonable for most deals. The economy has been on sound footing, and companies have required capital to grow their businesses. It remains to be seen if this environment will persist or if perhaps some borrowing was pulled forward ahead of the November presidential election. Bottom line, the new issue market has been incredibly busy and has functioned at a high level throughout the first three quarters of 2024.

Investment-grade credit metrics continued to display resilience at the end of the second quarter, benefiting from an economy that has continued to grow. EBITDA margins were 30.3% at the end of 2Q, a new all-time high, while EBITDA growth was at its highest level in two years. Interest coverage also improved incrementally during the quarter, but this was offset by slightly higher leverage across the IG universe. Putting it all together, we believe that IG credit offers plenty of opportunities to invest in appropriately capitalized companies with good businesses at attractive spreads.

What a Difference a Year Makes

The Fed delivered a 50bp cut at its September meeting. This was after electing to hold its policy rate constant at the July meeting, and there was no meeting in the month of August. The Fed “Dot Plot” that was released coincident with the meeting showed that the median views of the 19 FOMC members were as follows: 50bps of additional cuts in 2024, 100bps of cuts in 2025, and a further 50bps of cuts in 2026. Market participants were taking a more dovish view than the Fed’s projection for the balance of 2024, with Fed Funds futures pricing 71bps of cuts before year-end as of October 1. We believe that this easing cycle will be a deliberate one that plays out over the course of several years. The Fed cannot afford to move too hastily due to the risk of reigniting inflationary pressures. The wildcard is that the Fed could cut its rate more quickly and aggressively if the labor market deteriorates rapidly from current levels, as that has historically been a leading indicator of recession.

We thought it would be instructive to illustrate the progression of investment grade returns over the course of the tightening cycle that has since turned into an easing cycle. The chart on the ensuing page depicts the total return for the IG index since inception but we have snipped the data to show the current cycle from the beginning of 2022 through the third quarter of 2024. The market hit its low for the current cycle in October 2022 before it recovered into 2023 as it traded sideways before taking another leg lower in October 2023. There was a powerful move higher during the fourth quarter of 2023 before the market treaded water for most of this year until the recent quarter where it has once again trended in a positive direction.

The vertical lines on the chart represent pivotal Fed meetings that have occurred since the beginning of 2022, which we will explore further below. As a disclaimer, we would be remiss if we did not say that this analysis is far easier with the benefit of hindsight but we believe it is an interesting exercise nonetheless.

3/16/2022 – The first policy rate hike of the tightening cycle. This was well telegraphed and anticipated by investors and many thought that the Fed should have moved even sooner in order to combat inflation.

7/26/2023 – The last rate hike of the tightening cycle. This pushed the policy rate to a 22-year high. Recall that, at the time, it was quite unclear if the Fed was done hiking. After all, the Fed already paused once in June only to hike again at this meeting. To quote Chairman Powell at the news conference following the FOMC decision “It is certainly possible that we will raise rates again at the September meeting,” he said. “And I would also say it’s possible that we would choose to hold steady at that meeting.”

9/20/2023 – The Fed pauses again for the first time since June but is non-committal about further hikes.

11/1/2023 – The Fed pauses for a third time in the cycle and Powell’s remarks indicate that the bar is higher for further tightening through adjustments to the policy rate. Is it any coincidence that the market ripped higher through year end?

7/31/2024 – The Fed holds rates steady but indicates that near-term cuts are on the horizon.

9/18/2024 – The Fed delivers its first rate cut of the current cycle. Through the end of the third quarter, the IG index had recovered nearly the entirety of the value it lost during the tightening cycle. The index has posted a +14.28% total return from the end of the third quarter 2023 to the end of the third quarter 2024.

What has Changed for Our Portfolio?
The biggest change we have been able to implement in 2024 is that sales and extensions have once again become economic. A large portion of what we are trying to accomplish for our clients is derived from our intermediate positioning. We generally populate new accounts with bonds that mature in 8-10 years. We will then allow those bonds to roll down the yield curve, with the goal of spread compression as the bonds move toward the 5yr mark. With about 5yrs to maturity, you will start to see us sell bonds and extend further back out the curve. This allows us to mitigate interest rate risk and capture the steepness of the 5/10 Treasury curve as well as the corporate credit curve. This all holds true in normalized times but the last two years have been anything but that! The 2/10 Treasury curve was inverted for a record consecutive 25 months (see below chart from St. Louis Fed). This made our sale and extension trades uneconomic –the math simply dictated that our clients were, in many cases, better off holding their existing bonds longer than they would typically, allowing the tightening cycle to pass and buying time for the curve to regain steepness. We were still busy during this time researching and monitoring credits and making changes at the margins but our sale activity for fully invested accounts during the peak of the curve inversion was severely diminished. This has changed in a big way in 2024 as curves have begun to normalize and we are finding many more attractive trading opportunities which we have used to add value for our clients. Our turnover has doubled over the past year and is now approaching a figure that is much more in-line with historical averages.

As far as valuation is concerned, IG credit spreads are at the tight end of historical ranges. We believe spreads are fairly valued given the strength of credit metrics across the IG universe and the resilience of the U.S. economy. Credit spreads are pricing in very little chance of a recession, but we feel that investors are afforded some downside protection from an economic slowdown due to Treasury yields that are still elevated relative to medium-term averages. The yield to maturity for the investment-grade index at the end of the third quarter was 4.73% while the 10yr average was 3.62%. The chart paints an approximate picture of what a new account in CAM’s Investment Grade program could expect at quarter end.

Entering The Homestretch
As we enter the final few months of the year, we can’t help but feel that market participants are almost too comfortable. The median probability of a recession over the next calendar year according to a Bloomberg survey of economists has fallen to 30%, down from 55% a year ago. There has been great progress with inflation, but there is still work to do and there are risks to the downside if the Fed is too aggressive with easing its policy rate. There are numerous geopolitical issues and serious ongoing conflicts throughout the world. A U.S. presidential election is less than a month away. Despite these risks, domestic equity indices are at all-time highs and credit spreads are snug. While the probability of a soft landing has increased, there is still reason for caution.

We continue to be fastidious when populating our investor portfolios. We are on the hunt for durable businesses with strong free cash flow and credit metrics that are robust enough to weather a downturn. Please contact us with any questions or topics for discussion. We are grateful for your interest and partnership.

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. Additional disclosures on the material risks and potential benefits of investing in corporate bonds are available on our website: https://www.cambonds.com/disclosure-statements/

i Bloomberg, October 1 2024 “IG PIPELINE: Quiet Start to 4Q After Record September”
ii Barclays FICC Research, September 9 2024 “US Investment Grade Credit Metrics, Q2 24 Update: Staying afloat”
iii The Federal Reserve Board, September 19 2024 “Summary of Economic Projections”
iv Bloomberg, October 1 2024 “World Interest Rate Probability”
v AP News, July 26 2023 “Federal Reserve raises rates for 11th time to fight inflation but gives no clear sign of next move”
vi Thomson Reuters, August 5 2024 “Key US bond yield curve turns positive on recession fears”
vii Bloomberg, October 3 2024 “United States Recession Probability Forecast”

14 Oct 2024

High Yield Quarterly, Insight CAM Team 0 comment

2024 Q3 High Yield Quarterly

In the third quarter of 2024, the Bloomberg US Corporate High Yield Index (“Index”) return was 5.28% bringing the year to date (“YTD”) return to 8.00%. The S&P 500 index return was 5.89% (including dividends reinvested) bringing the YTD return to 22.08%. Over the period, while the 10-year Treasury yield decreased 62 basis points, the Index option-adjusted spread (“OAS”) tightened 14 basis points moving from 309 basis points to 295 basis points.

With regard to ratings segments of the High Yield Market, BB rated securities widened 3 basis points, B rated securities widened 6 basis points, and CCC rated securities tightened 166 basis points. The chart below from Bloomberg displays the spread moves in the Index over the past five years. For reference, the average level over that time period was 401 basis points.

The sector and industry returns in this paragraph are all Index return numbers. The Index is mapped in a manner where the “sector” is broader with the more specific “industry” beneath it. For example, Energy is a “sector” and the “industries” within the Energy sector include independent energy, integrated energy, midstream, oil field services, and refining. The Communications, REITs, and Technology sectors were the best performers during the quarter, posting returns of 10.99%, 6.12%, and 5.84%, respectively. On the other hand, Energy, Other Industrial, and Consumer Cyclical were the worst-performing sectors, posting returns of 2.76%, 3.21%, and 4.04%, respectively. At the industry level, wirelines, cable, and pharma all posted the best returns. The wirelines industry posted the highest return of 16.86%. The lowest-performing industries during the quarter were independent energy, oil field services, and automotive. The independent energy industry posted the lowest return of 2.03%.

The year continued with strong issuance during Q3 after the very strong start that took place in the first half of the year. The $83.7 billion figure is the most volume in a quarter since the fourth quarter of 2021 not counting Q1 this year. Of the issuance that did take place during Q3, Discretionary took 24% of the market share followed by Energy at 21% share and Financials at 16% share. YTD issuance stands at $258.5 billion.

The Federal Reserve did hold the Target Rate steady at the July meeting, but cut a half a point at the September meeting. There was no meeting held in August. The last cut to the Target Rate was back in March of 2020 and then held steady for two years before the Fed started a hiking campaign then ended with a final hike in July of 2023. The Fed dot plot shows that Fed officials are forecasting an additional 50 basis points in cuts during 2024. Market participants are forecasting a bit more aggressive Fed and are expecting 71 basis points in cuts for the remainder of this yearⁱ. After the cut at the September meeting Chair Powell commented, “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%.”ⁱⁱ The Fed’s main objective has been lowering inflation and it continues to generally trend in the desired direction. However, the cooling labor market is getting more of the Fed’s attention. Even though policymakers indicated that risks to employment and inflation are “roughly balanced,” the Fed’s updated economic projections show continued deterioration expected in the labor market. Chair Powell said a continuing slump in jobs would be “unwelcome.”

Intermediate Treasuries decreased 62 basis points over the quarter, as the 10-year Treasury yield was at 4.40% on June 30th, and 3.78% at the end of the third quarter. The 5-year Treasury decreased 82 basis points over the quarter, moving from 4.38% on June 30th, to 3.56% 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 3.0% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2025 around 1.8% with inflation expectations around 2.2%ⁱⁱⁱ.

Being a more conservative asset manager, Cincinnati Asset Management does not buy CCC and lower-rated securities. Additionally, our interest rate agnostic philosophy keeps us generally positioned in the five to ten-year maturity timeframe. During Q3, our higher quality positioning was a drag on performance as lower-rated securities significantly outperformed. Further, Index performance was very strong leading to our cash position also being a drag on performance. Additional performance detractors were our credit selections within the consumer cyclical sector and our underweight in the communications sector. Benefiting our performance this quarter were our credit selections in the energy sector, aerospace/defense industry, and construction machinery industry. Another benefit was added due to our underweight in the capital goods sector.

The Bloomberg US Corporate High Yield Index ended the third quarter with a yield of 6.99%. Treasury volatility, as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index), remains elevated from the 78 index average over the past 10 years. The current rate of 94 is well below the spike near 200 back during the March 2023 banking scare. The MOVE Index does show a general downward trend over the last two years. Data available through August shows 17 defaults during 2024 which is relative to 16 defaults in all of 2022 and 41 defaults in all of 2023. The trailing twelve month dollar-weighted default rate is 1.72%^iv. The current default rate is relative to the 1.93%, 2.38%, 2.67%, 2.15% default rates from the previous four quarter end data points listed oldest to most recent. Defaults are ticking lower and the fundamentals of high yield companies are in decent shape. From a technical view, fund flows were positive in the quarter at $5.7 billion^v. No doubt there are risks, but 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.

The high yield market continues to hum along with positive performance and attractive yields. Corporate fundamentals are broadly in good shape, defaults have moved lower, and issuance remains robust. While GDP still looks good, there are some items to note that are relevant to the consumer, namely rising delinquencies, depleted excess savings from the pandemic, and an unemployment rate that is on the rise. Recently reported consumer confidence fell the most in three years on labor market views. The Fed commenced rate cuts and stands ready to cut more as needed. Looking ahead, rising tension in the Middle East and the approaching US presidential election should certainly keep things interesting. Our exercise of discipline and credit selectivity is important as we continue to evaluate that the given compensation for the perceived level of risk remains appropriate. 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.

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. Additional disclosures on the material risks and potential benefits of investing in corporate bonds are available on our website: https://www.cambonds.com/disclosure-statements/.

i Bloomberg October 1, 2024: World Interest Rate Probability
ii Bloomberg September 18, 2024: Fed Cuts Rates by Half Point
iii Bloomberg October 1, 2024: Economic Forecasts (ECFC)
iv Moody’s September 17, 2024: August 2024 Default Report and data file
v CreditSights September 25, 2024: Fund Flows

11 Oct 2024

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

CAM Investment Grade Weekly Insights

Credit spreads inched tighter this week, breaching a new year-to-date low. The Bloomberg US Corporate Bond Index closed at 81 on Thursday October 10 after closing the week prior at 83. The 10yr Treasury yield was 9 basis points higher this week through Thursday, moving from 3.97% to 4.06%. Through Thursday, the corporate bond index year-to-date total return was +3.97%.

Economics

The highlights this week were led by CPI and PPI on Thursday and Friday, respectively. CPI came in a smidge hotter than expectations but it was not enough to meaningfully alter the outlook with regard to inflation and there was no real discernable impact to equities, credit or rates. The PPI data set was relatively tame and best described as in-line with expectations.

Next week is a light one from a data perspective with the only meaningful print occurring next Thursday morning with retail sales.

Issuance

It was a solid week for issuance as companies priced $16.1bln of new debt, besting the top end of the estimated range ($15bln). Bank earnings season is underway as of Friday and the big-six money center banks are expected to dabble in the primary market next week creating a wide range of estimates with dealers looking for $10-$30bln of new supply. Next week is a holiday shortened one with the market closed on Monday for Columbus Day. As the calendar rolls into the second half of October it would not surprise us if the new issue market took a breather heading into election season.

Flows

According to LSEG Lipper, for the week ended October 9, investment-grade bond funds reported a net inflow of +$1.83bln. This was the 11^th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$60.5bln.

11 Oct 2024

High Yield Weekly, Weekly Insights Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

The US junk-bond market stalled at the start of the fourth quarter and is headed for its second weekly loss this month and the biggest in five months. That’s after recording losses for seven straight sessions, the longest losing streak since mid April. Yields jumped to a four-week high of 7.25% and are on track to end the week at least 15 basis points higher, the largest jump in a week since April
The modest losses extended across ratings in the US high-yield market after a series of macro data points showed a relatively strong labor market, expanding US services activity and above all underlying inflation rising more than forecast. That crashed hopes of a 50-basis-point interest-rate cut by the Federal Reserve
In fact, Atlanta Fed President Raphael Bostic even said he was open to leaving interest-rates unchanged at one of the two meetings this year
Renewed concerns that policy easing may slowdown fueled losses across the US junk-bond market
Junk-bond yields are set to rise for the second week in a row. And BB yields climbed to a seven-week high of 6.10% after steadily gaining for nine days, the longest in 32 months. Yields are up 17 basis points week-to-date, the biggest jump in six months. BBs racked up losses for seven successive sessions, and are set to post the biggest weekly loss since week ended April 19
CCCs are set to record the first weekly loss in more than three months as yields are poised to close the week higher, the first weekly jump in six
While there was disappointment that the Fed may not cut rates by 50 basis points again in November, strong macro-economic data against the backdrop of a gradually easing rate policy quelled fears of a recession and provided a benign, stable environment for borrowers in the junk-bond market
Credit markets remain resilient in the face of rising rate volatility and Fed-related uncertainty, Brad Rogoff and Dominique Toublan from Barlcays wrote on Friday
Higher yields and relatively tight spreads pulled borrowers from the sidelines, although at a slower pace after the supply deluge last month
The primary market priced more than $4b in four sessions this week, driving October volume to almost $9b

04 Oct 2024

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds kick off the fourth quarter on a somber note and are on track to end the eight-week gaining streak to post their biggest weekly loss in four months. The US junk bond rally faded as the market posted losses for the second consecutive session on Thursday.
The broad rally petered out amid growing tensions in the Middle East and because data showed US services activity expanded at the fastest pace since February 2023. That damped hopes for a big rate cut in November.
The losses this week spanned across ratings in the US high-yield market. BBs are also headed for their first weekly loss in nine and the biggest since early May
US junk bond yields climbed to a two-week high of 7.06% after steadily rising for four straight sessions this week. This will be the first increase in nine weeks
BB yields also rose seven basis points in four sessions to 5.89%, a more than two week high
CCCs also recorded losses for two sessions in a row and are poised to close the week unchanged. Yields, though, have dropped further to a new 29-month low of 10.31%. Spreads closed at a new 30-month low of 629 basis points
While the broad rally took a pause, still-attractive yields and tight spreads against the backdrop of resilient economy and easing monetary policy pulled borrowers into the US junk bond market
After a brief respite from the supply deluge in September, five borrowers sold near $5b in the primary market this week
Appetite for credit remained strong despite tight valuations, lower yields and elevated supply, Barclays strategists Brad Rogoff and Dominique Toublan wrote on Friday

27 Sep 2024

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

CAM Investment Grade Weekly Insights

Credit spreads traded within a narrow window this week and are 1 basis point better week over week. The Bloomberg US Corporate Bond Index closed at 90 on Thursday September 26 after closing the week prior at 91. The 10yr Treasury yield was higher this week through Thursday, up 5.5 basis points from where it closed last Friday. Through Thursday, the corporate bond index year-to-date total return was +5.22%.

Economics

There were some data points during the week to highlight. One of the most interesting under the radar prints was consumer confidence on Tuesday morning which fell the most in three years from the prior month’s reading. A closer look at the data showed that consumers were hesitant to spend with a labor market that has been showing signs of slowing amid persistently high costs of living. On Thursday there was a GDP release that showed that figure coming in at +3% for the second quarter. This was slightly better than the consensus estimate and economists are looking for an expansion of +2% in the third quarter. So, while GDP may be slowing, it is expected to remain in positive territory. The most anticipated release of the week was PCE and spending data on Friday morning. The Fed’s preferred inflation gauge and spending both rose at very modest levels which is likely to keep the Fed on track for another cut at its November 7^th meeting, although there is still plenty of data that could sway them between now and then. Recall that there is no meeting in the month of October.

Next week is very similar to this week in that there are some meaningful data points but we will again have to wait until Friday for the main event which is the September payroll release.

Issuance

It was déjà vu all over again as issuance this week once again exceeded expectations. Companies brought $37bln of new bonds to market relative to the high end of estimates at $25bln. This capped off the busiest September on record at $168bln of monthly supply. The previous high-water mark was $164bln amid the pandemic borrowing binge of September 2020. Interestingly, according to sources compiled by Bloomberg, this was the fourth month this year where a record for monthly issuance volume was broken. The previous record setting months were January, February and July. More than 1.261 trillion of new debt has been priced in 2024 putting it a whopping +29% ahead of 2023’s pace. As we have written in previous commentaries it is somewhat of a goldilocks scenario for both borrowers and lenders (bond sellers and bond buyers) in that the prices paid are attractive for both parties. Absent any meaningful move in either direction for rates and/or spread we would expect this type of environment to persist although we could see a slowdown ahead of the November 5^th presidential election.

Flows

According to LSEG Lipper, for the week ended September 25, investment-grade bond funds reported a net inflow of +$1.34bln. Short and intermediate investment-grade bond funds have seen positive flows 33 of the past 39 weeks. The total year-to-date flows into investment grade funds are +$55.1bln.

27 Sep 2024

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds rebounded cautiously after a four-day losing streak as spreads dropped just below 300 basis points and yields held steady at 7.03%.
Junk bond yields, prices and returns came under pressure after a barrage of new issuance took the week’s volume to $9b and September supply to more than $34b. The month’s supply is up 44% year-over-year
17 borrowers, the most since May, jumped into the market to sell $9b this week
The primary market was spurred by a half percentage-point cut in interest rates by the Federal Reserve.
Investors, still hungry for new paper, continued to flock to new issues
Barclays strategists Bradley Rogoff and Dominique Toublan expect to see attractive opportunities across the investment grade and high yield market despite tighter valuations after the beginning of the rate- cutting cycle in the US and Europe
The market rebounded on Thursday across the rating spectrum, ending the four-day decline
Barclays strategists Rogoff, Andrew Johnson and Corry Short expect CCCs to outperform through the year-end. Historically, when CCCs outperform through the third quarter, they tend to continue that trend through the year-end, they wrote on Friday

(Bloomberg) Fed’s Favored Inflation Gauge, Consumer Spending Barely Rise

The Federal Reserve’s preferred measure of underlying US inflation and household spending rose modestly in August, underscoring a cooling economy.
The so-called core personal consumption expenditures price index, which excludes volatile food and energy items, increased 0.1% from July, according to Bureau of Economic Analysis data out Friday. On a three-month annualized basis, the measure rose 2.1%, in line with the central bank’s target.
Spending also rose 0.1% after adjusting for inflation. Nominal personal income increased 0.2% and the saving rate eased to 4.8%.
Treasury yields and the dollar fell on expectations the figures will keep the Fed on track for more rate cuts in the coming months while fueling ongoing debate over how big the reductions should be. The central bank opted for an outsize half-point cut this month to kick off its easing cycle, and investors are split over whether it will take a similar step or opt for a smaller move in November, according to futures.
“The modest rise in consumer inflation in August on its own provides strong reason for the Fed to continue easing the still restrictive monetary policy stance,” Kathy Bostjancic, chief economist at Nationwide, said in a note. “The tepid 0.1% rise in real consumer spending in August underscores that consumers are becoming more frugal in their spending and that the momentum in spending is slowing.”
Details of the August inflation numbers showed a broad cooling. Services prices excluding housing and energy rose 0.2% for a second month. Goods prices minus food and energy declined 0.2%, the most in three months.
The spending data also points to an economy that’s gradually slowing this year. Overall services spending, which makes up the bulk of household consumption, rose 0.2% in August, marking the smallest three-month gain since October 2023. Goods spending was unchanged following a solid advance in July.
Wages and salaries rose by the most since May. Still, growth in overall disposable income slowed, restrained by declines in proprietors’ income, interest income and dividend income.
Separate data published Friday by the Census Bureau showed the advance goods trade deficit narrowed in August to $94.3 billion — the least since March — while growth in wholesale and retail inventories moderated. Results of a Bloomberg survey showed forecasters expect inflation to return to the Fed’s 2% target by early next year.
Friday’s data follow annual revisions to gross domestic product data published Thursday by the BEA, which showed faster economic growth and more saving — fueled by higher incomes — than previously reported in 2022 and 2023.
The Bureau of Labor Statistics will provide a monthly update on hiring and unemployment for September on Oct. 4.

20 Sep 2024

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 for their seventh weekly gain after amassing the biggest one-day returns in six weeks. The market is poised for the biggest weekly jump in four months, with returns of 0.86% so far this week.
Yields plunged, falling below 7% for the first time since April 2022, after Fed Chair Jerome Powell made an aggressive start to easing by lowering the interest rate by a half percentage point aimed at bolstering the US labor market.
The broad gains spanned across the US high yield market on expectations that the Federal Reserve will be able to engineer a soft landing. After the 50 basis point cut this week, Bank of America economists expect another 75 basis points cuts in the fourth quarter.
Also, Chair Powell instilled confidence in markets claiming that the aggressive 50 basis point cut was just “recalibration” and was not a sign of fundamental deterioration, Brad Rogoff and Dominique Toublan wrote on Friday.
CCCs, the riskiest tier of the US junk bond market, is on track for a 12th week of gains, the longest rallying streak since January 2021. The week-to-date returns are 1.84%, the most in a week in 2024, after notching up gains for 12 days in a row.
CCC yields tumbled 16 basis points on Friday to 10.51%, the lowest since May 2022, and is on course for a third week of declines after dropping 43 basis points this week.
CCC spreads tightened for the ninth consecutive session to 664, the longest tightening stretch in 20 months.
BB yields dropped to a new 27-month low and closed at 5.79%. Spreads closed at 183.
Primary activity gained new momentum as the soft landing narrative gained market credence against the backdrop of falling inflation and easing interest-rates.
The market has seen a flurry of new deals, bringing the September tally to $24b, up 34% already over last September and there one full week to go.

20 Sep 2024

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

CAM Investment Grade Weekly Insights

Credit spreads moved meaningfully tighter this week with the index trading at its richest level since late July. The Bloomberg US Corporate Bond Index closed at 91 on Thursday September 19 after closing the week prior at 96. The 10yr Treasury yield drifted higher throughout the week, up 6 basis points from where it closed last Friday. The entire Treasury curve continued to steepen on the back of Wednesday’s policy rate cut by the FOMC. Through Thursday, the corporate bond index year-to-date total return was +5.58%.

Economics

The long awaited FOMC rate cut finally came to fruition this week. The Fed elected to kick things off with a 50bp cut. We would not call this a surprise, per se, but 25bps was what the market was looking for up until the middle of last week when the odds (Fed Funds futures) started to show an increasing likelihood of 50bps. The Summary of Economic Projections (SEP or Dot Plot) that was released at this meeting showed that a majority of FOMC members believe that there will be 50bps of additional cuts in 2024 and 100bps of cuts in 2025. The Fed does not meet in October so market prognosticators have extrapolated a 25bp cut at each of the November and December meetings. By all accounts it appears that the Fed was close to delivering a 25bp cut at its July meeting (there was no August meeting) and employment revisions and economic data since that time led them to “catch up” to the fact that they did not cut earlier by kicking things off with 50bps instead of 25bps. Remember that the September SEP is merely a forecast and does not necessarily reflect what will actually occur in the future. The SEP is only updated once every three months and simply reflects the median view of the FOMC members at a given point in time. That being said, 50bps of cuts in ’24 with an additional 100bps in ’25 sounds right to us given what we know today and what has been a resilient economy. We would also expect that at some point in 2025 the Fed may elect to end its balance sheet reduction (aka QT or quantitative tightening). The Fed kept its current plan in place for the time being where it will continue to allow $60bln of its balance sheet reduce each month. The current cycle of QT has reduced the Fed’s balance sheet from a peak of $9bln in mid-2022 to just above $7bln today, which is still elevated relative to pre-pandemic levels. The Fed’s balance sheet prior to March 2020 was just ~$4.25bln and prior to the 2008 financial crisis it was zero!

Next week is reasonably busy from an economic data standpoint. The highlights include consumer confidence, new home sales, GDP and the main event next Friday morning with core PCE.

Issuance

Issuance was light this week and underwhelmed relative to expectations as just $12.4bln of new debt was sold relative to the forecast of $25bln. In our view this “miss” can be explained by the mid-week Fed meeting and pull forward of issuance earlier this month as borrowers took advantage of a red-hot primary market in the days immediately following Labor Day. Dealers are calling for $20-$25bln of issuance next week. Over $131bln of debt has been priced so far in the month of September 2024. The five-year average for September is $136bln with the busiest year being 2020 when $164bln priced during the month.

Flows

According to LSEG Lipper, for the week ended September 18, investment-grade bond funds reported a net inflow of +$1.86bln. Short and intermediate investment-grade bond funds have seen positive flows 32 of the past 38 weeks. The total year-to-date flows into investment grade funds are +$53.8bln.

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