Category: Insight

25 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 their biggest weekly loss in six months as yields surge alongside rise in Treasury yields and 9% loss in equities so far this week. Yields advanced in three of the last four sessions to close at 7.31%, up 15 basis points in four sessions.
  • Although the broad market recovered modestly on Thursday from the three-day losing streak, it’s on track to register losses across ratings. CCCs are set to post their first weekly loss in more than three months and the biggest since the week ended June 28.
  • The losses, while partly caused by expectations that the Federal Reserve will have a more measured approach on rate cuts, are also due to a sudden surge in new bond sales. Ten borrowers sold more than $6b this week, the second busiest week this month
  • Strong economic data, together with easing interest-rate policy, pulled borrowers into the market both for refinancing and funding acquisitions
  • Four more borrowers sold $3.5b on Thursday and two of the four funded leveraged buyouts
  • Month to date issuance is over $20b

 

(Bloomberg)  Treasuries Plunge Like It’s 1995 as Traders See Soft Landing

  • The last time US government bonds sold off this much as the Federal Reserve started cutting interest rates, Alan Greenspan was orchestrating a rare soft landing.
  • Two-year yields have climbed 34 basis points since the Fed reduced rates on Sept. 18 for the first time since 2020. Yields rose similarly in 1995, when the Fed — led by Greenspan — managed to cool the economy without causing a recession. In prior rate cutting cycles going back to 1989, two-year yields on average fell 15 basis points one month after the Fed started slashing rates.
  • Rising yields “reflect the reduced probability of recession risks,” said Steven Zeng, an interest rate strategist at Deutsche Bank AG. “Data has come in pretty strong. The Fed may slow the pace of rate cuts.”
  • The latest backup in yields shows how a resilient US economy and buoyant financial markets limit the options for Fed Chair Jerome Powell to aggressively lower rates. Interest swaps show traders are expecting the Fed to lower rates by 128 basis points through September 2025, compared with 195 basis points priced in about a month ago.
  • Global bonds have been sliding this week as investors weigh the potential of slower rate reductions.
  • The selloff extended slightly on Tuesday, pushing the 10-year yield up about one basis point after an increase of 11 basis points on Monday. The recent rise has brought the yield on the benchmark to around 4.2%, up from a 15-month low of 3.6% on Sept. 17 — one day before the Fed lowered borrowing costs by half a point.
  • On Tuesday, trading activities suggested that sentiment remains bearish, with a series of sales of block trades in 10-year note futures. In the options market, one trade targets the 10-year yields rising to about 4.75% by the option expiry on Nov. 22.
  • In 1995, the Fed slashed interest rates just three times — from 6% to 5.25% — in six months, after lifting them sharply. Yields on 10-year notes jumped more than 100 basis points 12 months later after the first cut that year, while two-year yields rose 90 basis points.
  • Currently, volatility has also picked up. The ICE BofA Move Index, which tracks expected swings in Treasuries in the coming month, has climbed to the highest level this year.

 

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

25 Oct 2024
Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads moved wider this week after touching their snuggest levels of the year just 7 days ago.  The Bloomberg US Corporate Bond Index closed at 84 on Thursday October 24 after closing the week prior at 81.  The 10yr Treasury yield moved higher this week, cresting at a 3-month high on Wednesday. The 10yr moved from 4.08% last Friday to 4.21% through Thursday.  Through Thursday, the corporate bond index year-to-date total return was +3.14%.  The yield to maturity on the corporate index has inched back above 5% and closed Thursday at a YTM of 5.08%.

 

 

Economics

It was a benign week for economic data with little in the way of market moving prints.  Existing home sales didn’t improve in September even as mortgage rates came down which was somewhat of a surprise but with no discernible market impact.  S&P global PMI numbers were in line with expectations.  Next week brings some more meaningful releases with GDP as well as personal income/spending and the all-important Core PCE.  Looking ahead, the FOMC meets on November 7.  Recall that there is no Fed meeting in the month of October.

Issuance

It was an underwhelming week for issuance, which is not something that we have been able to write very frequently throughout 2024.  Companies priced just $12.1bln of high-grade bonds relative to the consensus estimate of $20bln.   Treasury yields have moved higher over the past few weeks making issuance slightly less attractive for borrowers.  We are also in the midst of corporate earnings meaning the window is closed for some companies.  We expect another relatively quiet week ahead with the election fast approaching.

Flows

According to LSEG Lipper, for the week ended October 23, investment-grade bond funds reported a net inflow of +$1.88bln.  This was the 13th consecutive week where the asset class reported an inflow.  Total year-to-date flows into investment grade funds were +$64.6bln.

 

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.

23 Oct 2024
Insight, Investment Grade Quarterly CAM Team 0 comment

2024 COMENTARIO DEL TERCER TRIMESTRE

El crédito con grado de inversión registró un sólido desempeño durante el tercer trimestre, ya que los tenedores de bonos se beneficiaron de diferenciales de crédito más ajustados y rendimientos de los bonos del Tesoro más bajos. La Reserva Federal finalmente dio inicio al tan esperado ciclo de flexibilización al reducir su tasa de referencia por primera vez desde marzo de 2020. Seguimos siendo constructivos respecto del mercado de bonos con grado de inversión en el corto y mediano plazo.

El diferencial ajustado por opciones (OAS) en el Índice de bonos corporativos de EE. UU. de Bloomberg abrió el tercer trimestre en 94 y cotizó en un amplio 111 a principios de agosto antes de terminar el trimestre con un diferencial de 89. Agosto trajo consigo algunos días hábiles volátiles, algo que aún no habíamos experimentado en 2024. La debilidad de los datos sobre manufactura y empleo perjudicaron el ánimo de los inversores y los índices bursátiles se desplomaron, lo que repercutió en los diferenciales de crédito. La debilidad en los diferenciales duró poco. El índice IG cerró en 111 el 5 de agosto antes de retroceder gradualmente hasta los 100 puntos el 14 de agosto. A partir de ahí, los diferenciales continuaron reduciéndose hacia el final del trimestre.

Los rendimientos de los bonos del Tesoro bajaron significativamente durante el trimestre, lo que supuso un viento a favor para los rendimientos totales. Esto contrasta con el segundo trimestre, en el que las tasas aumentaron en general. El extremo inicial de la curva de rendimiento fue especialmente más bajo en el tercer trimestre, con el Tesoro a 2 años registrando un enorme movimiento intertrimestral a la baja de -111 puntos básicos. Consideramos este repunte en la parte inicial de la curva como una respuesta clásica al recorte de la Reserva Federal, ya que históricamente las tasas a corto plazo suelen verse mucho más afectadas que las tasas más alejadas de la curva.

La emisión corporativa con grados de inversión continuó a su ritmo vertiginoso. Tanto julio como septiembre establecieron récords históricos por el mayor volumen jamás llevado al mercado en cada uno de esos meses. Se emitieron 1,264 billones de dólares de nueva deuda con grado de inversión durante el tercer trimestre, lo que supone una ventaja del 29% con respecto al ritmo de 2023 – y 2023 no se quedó atrás. Como hemos escrito en notas anteriores, el mercado de nuevas emisiones de 2024 ha estado en una zona privilegiada. Los prestatarios con calificación IG se han sentido cómodos con las tasas que están pagando, y los inversores han estado satisfechos con la compensación brindada. Los flujos de fondos han sido muy positivos y han apoyado la demanda de los inversores, y las concesiones por nuevas emisiones han sido razonables para la mayoría de las operaciones. La economía ha estado en una situación sólida y las empresas han necesitado capital para hacer crecer sus negocios. Queda por ver si este entorno persistirá o si tal vez se adelantó algún endeudamiento antes de las elecciones presidenciales de noviembre. En resumen, el mercado de nuevas emisiones ha estado increíblemente activo y ha funcionado a un alto nivel durante los primeros tres trimestres de 2024.

Los indicadores crediticios con grado de inversión continuaron mostrando resiliencia al final del segundo trimestre, beneficiándose de una economía que ha seguido creciendo. Los márgenes de EBITDA fueron del 30.3% al final del segundo trimestre, un nuevo máximo histórico, mientras que el crecimiento del EBITDA estuvo en su nivel más alto en dos años.  La cobertura de intereses también mejoró gradualmente durante el trimestre, pero esto fue contrarrestado por un apalancamiento ligeramente mayor en todo el universo IG.  En resumen, creemos que el crédito IG ofrece muchas oportunidades para invertir en empresas adecuadamente capitalizadas con buenos negocios y diferenciales atractivos.

Un año puede marcar una gran diferencia

La Reserva Federal aplicó un recorte de 50 puntos básicos en su reunión de septiembre.  Esto ocurrió después de haber elegido mantener constante su tasa de referencia en la reunión de julio y no haber habido reunión en agosto.  El “gráfico de puntos” de la Reserva Federal que se publicó coincidiendo con la reunión mostró que la mediana de los puntos de vista de los 19 miembros del Comité Federal del Mercado Abierto (FOMC) eran las siguientes: 50 puntos básicos de recortes adicionales en 2024, 100 puntos básicos de recortes en 2025 y otros 50 puntos básicos de recortes en 2026. Los participantes del mercado adoptaron un punto de vista más moderado que la proyección de la Reserva Federal para el resto de 2024, y los futuros de los fondos de la Reserva Federal desestimaron recortes de 71 puntos básicos antes de fin de año al 1 de octubre. Creemos que este ciclo de flexibilización será deliberado y se desarrollará a lo largo de varios años.  La Reserva Federal no puede darse el lujo de actuar demasiado apresuradamente debido al riesgo de reavivar las presiones inflacionarias.  El comodín es que la Reserva Federal podría recortar su tasa más rápida y agresivamente si el mercado laboral se deteriora rápidamente respecto de los niveles actuales, ya que históricamente ese ha sido un indicador adelantado de recesión.

Pensamos que sería instructivo ilustrar la progresión de los rendimientos de grado de inversión a lo largo del ciclo de ajuste que desde entonces se ha convertido en un ciclo de flexibilización. El gráfico de la página siguiente muestra el rendimiento total del índice IG desde su inicio, pero hemos recortado los datos para mostrar el ciclo actual desde principios de 2022 hasta el tercer trimestre de 2024.  El mercado alcanzó su mínimo del ciclo actual en octubre de 2022 antes de recuperarse en 2023, operando de forma lateral antes de volver a caer en octubre de 2023.  Hubo un poderoso aumento durante el cuarto trimestre de 2023 antes de que el mercado se mantuviera estancado durante la mayor parte de este año hasta el último trimestre, donde una vez más ha tendido en una dirección positiva.

Las líneas verticales del gráfico representan reuniones cruciales de la Reserva Federal que han tenido lugar desde principios de 2022, las cuales exploraremos más adelante.  A modo de aclaración, seríamos negligentes si no dijéramos que este análisis es mucho más fácil con el beneficio de la retrospectiva, pero creemos que, no obstante, es un ejercicio interesante.

3/16/2022: El primer aumento de la tasa de referencia del ciclo de ajuste.  Esto fue bien anunciado y anticipado por los inversores y muchos pensaron que la Reserva Federal debería haber actuado incluso antes para combatir la inflación.

7/26/2023: El último aumento de la tasa del ciclo de ajuste.  Esto llevó la tasa de referencia a su nivel más alto en 22 años.  Recordemos que, en ese momento, no estaba del todo claro si la Reserva Federal había concluido con los aumentos.  Después de todo, la Reserva Federal ya hizo una pausa en junio para luego volver a aumentar las tasas en esta reunión.  En la conferencia de prensa posterior a la decisión del FOMC, el presidente Powell dijo: “Ciertamente es posible que volvamos a aumentar las tasas en la reunión de septiembre”. “Y yo también diría que es posible que optemos por mantenernos firmes en esa reunión”.

9/20/2023: La Reserva Federal vuelve a hacer una pausa por primera vez desde junio, pero no se compromete a realizar más alzas.

11/1/2023: La Reserva Federal hace una tercera pausa en el ciclo y los comentarios de Powell indican que la vara está más alta para un mayor ajuste a través de ajustes a la tasa de referencia.  ¿Es coincidencia que el mercado haya subido mucho a finales de año?

7/31/2024: La Reserva Federal mantiene estables las tasas, pero indica que se vislumbran recortes a corto plazo.

9/18/2024: La Reserva Federal aplica su primer recorte de tasas del ciclo actual.  Al final del tercer trimestre, el índice IG había recuperado casi la totalidad del valor que perdió durante el ciclo de ajuste.  El índice ha registrado un rendimiento total del +14.28% desde el final del tercer trimestre de 2023 hasta el final del tercer trimestre de 2024.

¿Qué ha cambiado en nuestra cartera?

El mayor cambio que hemos podido implementar en 2024 es que las ventas y ampliaciones han vuelto a ser económicas.  Gran parte de lo que intentamos lograr para nuestros clientes se deriva de nuestro posicionamiento intermedio.  Generalmente poblamos las cuentas nuevas con bonos que vencen en 8 a 10 años.  Luego permitiremos que esos bonos desciendan por la curva de rendimiento, con el objetivo de comprimir los diferenciales a medida que los bonos se acerquen a la marca de los 5 años.  Cuando falten unos 5 años para el vencimiento, empezaremos a vender bonos y a ampliar la curva.  Esto nos permite mitigar el riesgo de tasa de interés y captar la inclinación de la curva de 5/10 del Tesoro, así como la curva de crédito corporativo.  ¡Todo esto es cierto en tiempos normalizados, pero los últimos dos años han sido todo lo contrario!  La curva de bonos 2/10 del Tesoro se invirtió durante un récord de 25 meses consecutivos (consulte el gráfico a continuación de la Reserva Federal de St. Louis).[i] Esto hizo que nuestras operaciones de venta y extensión fueran antieconómicas: las matemáticas simplemente dictaban que a nuestros clientes, en muchos casos, les convenía mantener sus bonos existentes durante más tiempo del habitual, para permitir que pasara el ciclo de ajuste y ganar tiempo para que la curva recuperara su inclinación.  Durante este tiempo, seguíamos ocupados investigando y supervisando los créditos y realizando cambios en los márgenes, pero nuestra actividad de venta de cuentas totalmente invertidas durante el punto máximo de la inversión de la curva se vio gravemente disminuida.  Esto cambió de manera importante en 2024, ya que las curvas comenzaron a normalizarse y estamos encontrando oportunidades comerciales mucho más atractivas que hemos utilizado para agregar valor para nuestros clientes.  Nuestro volumen se duplicó durante el último año y ahora se acerca a una cifra mucho más acorde con los promedios históricos.

¿El crédito IG es caro o barato?

En lo que se refiere a la valoración, los diferenciales de crédito de IG se encuentran en el extremo ajustado de los rangos históricos.    Creemos que los diferenciales están bastante valorados dada la solidez de las métricas crediticias en todo el universo IG y la resiliencia de la economía estadounidense.  Los diferenciales de crédito incorporan en los precios muy pocas probabilidades de una recesión, pero creemos que los inversores cuentan con cierta protección frente a una desaceleración económica debido a que los rendimientos de los bonos del Tesoro aún son elevados en relación con los promedios de mediano plazo.  El rendimiento al vencimiento del índice de grado de inversión al final del tercer trimestre fue del 4.73%, mientras que el promedio de 10 años fue del 3.62%.  El gráfico de la derecha muestra una imagen aproximada de lo que una nueva cuenta en el programa de Grado de Inversión de Cincinnati Asset Management, Inc. (CAM) podría esperar al final del trimestre.

Entrando en la recta final

A medida que entramos en los últimos meses del año, no podemos evitar la sensación de que los participantes del mercado están casi demasiado cómodos.  La probabilidad media de una recesión durante el próximo año calendario, según una encuesta de economistas de Bloomberg, ha caído al 30% frente al 55% de hace un año. Se han logrado grandes avances en materia de inflación, pero aún queda trabajo por hacer y hay riesgos a la baja si la Reserva Federal es demasiado agresiva al flexibilizar su tasa de referencia.  Existen numerosos problemas geopolíticos y graves conflictos en curso en todo el mundo.  Las elecciones presidenciales en Estados Unidos se celebrarán en menos de un mes.  A pesar de estos riesgos, los índices bursátiles nacionales se encuentran en máximos históricos y los diferenciales de crédito se mantienen ajustados.  Si bien es cierto que la probabilidad de un impacto controlado ha aumentado, todavía hay motivos para ser cautelosos.

Seguimos siendo meticulosos a la hora de completar nuestras carteras de inversores.  Estamos en la búsqueda de empresas duraderas con un fuerte flujo de caja libre y métricas crediticias que sean lo suficientemente sólidas como para resistir una recesión.  Contáctenos si tiene alguna pregunta o desea hablar sobre algún tema.  Agradecemos su interés y colaboración.

Esta información solo tiene el propósito de dar a conocer las estrategias de inversión identificadas por Cincinnati Asset Management. Las opiniones y estimaciones ofrecidas están basadas en nuestro criterio y están sujetas a cambios sin previo aviso, al igual que las declaraciones sobre las tendencias del mercado financiero, que dependen de las condiciones actuales del mercado. Este material no tiene como objetivo ser una oferta ni una solicitud para comprar, mantener ni vender instrumentos financieros.  Los valores de renta fija pueden ser vulnerables a las tasas de interés vigentes.  Cuando las tasas aumentan, el valor suele disminuir.  El rendimiento pasado no es garantía de resultados futuros.  El rendimiento bruto de la tarifa de asesoramiento no refleja la deducción de las tarifas de asesoramiento de inversión.  Nuestras tarifas de asesoramiento se comunican en el Formulario ADV Parte 2A.  En general, las cuentas administradas mediante programas de firmas de corretaje incluyen tarifas adicionales.  Los rendimientos se calculan mensualmente en dólares estadounidenses e incluyen la reinversión de dividendos e intereses. El índice no está administrado y no considera las tarifas de la cuenta, los gastos y los costos de transacción.  Se muestra con fines comparativos y se basa en información generalmente disponible al público tomada de fuentes que se consideran confiables.  No se hace ninguna afirmación sobre su precisión o integridad. 

 

La información suministrada en este informe no debe considerarse una recomendación para comprar o vender ningún valor en particular.  No hay garantía de que los valores que se tratan en este documento permanecerán en la cartera de una cuenta en el momento en que reciba este informe o que los valores vendidos no se hayan vuelto a comprar.  Los valores de los que se habla no representan la cartera completa de una cuenta y, en conjunto, pueden representar solo un pequeño porcentaje de las tenencias de cartera de una cuenta.  No debe suponerse que las transacciones de valores o participaciones analizadas fueron o demostrarán ser rentables, o que las decisiones de inversión que tomemos en el futuro serán rentables o igualarán el rendimiento de la inversión de los valores discutidos en este documento.    Como parte de la educación de los clientes sobre la estrategia de CAM, podemos proporcionar información de vez en cuando que incluya referencias a tasas y diferenciales históricos.  Los ejemplos hipotéticos que hacen referencia al nivel o cambios en las tasas y diferenciales tienen únicamente fines ilustrativos y educativos.  No pretenden representar el desempeño de ninguna cartera o valor en particular, ni incluyen el impacto de las tarifas y gastos.  Tampoco toman en consideración todas las condiciones económicas y de mercado que habrían influido en nuestra toma de decisiones.  Por lo tanto, las cuentas de los clientes pueden experimentar o no escenarios similares a los mencionados en este documento.

En nuestro sitio web se encuentran disponibles las divulgaciones adicionales sobre los riesgos materiales y los posibles beneficios de invertir en bonos corporativos: https://www.cambonds.com/disclosure-statements/

i Bloomberg, 1 de octubre de 2024 “IG PIPELINE: Comienzo tranquilo del cuarto trimestre tras un septiembre récord”

ii Investigación de Barclays FICC, 9 de septiembre de 2024 “Métricas de crédito con grado de inversión de EE. UU., actualización del segundo trimestre de 2024: mantenimiento a flote”

iii Junta de la Reserva Federal, 19 de septiembre de 2024 “Resumen de proyecciones económicas”

iv Bloomberg, 1 de octubre de 2024 “Probabilidad de la tasa de interés mundial”

v AP News, 26 de julio de 2023 “La Reserva Federal aumenta las tasas por undécima vez para combatir la inflación, pero no da señales claras de su próximo movimiento”

vi Thomson Reuters, 5 de agosto de 2024 “La curva de rendimiento de los bonos clave de EE. UU. se vuelve positiva por temores de recesión”

vii Bloomberg, 3 de octubre de 2024, “Pronóstico de probabilidad de recesión en Estados Unidos”

18 Oct 2024
Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads moved tighter again this week and are now trading at the narrowest levels that they have seen in years.  The Bloomberg US Corporate Bond Index closed at 79 on Thursday October 17 after closing the week prior at 81.  The 10yr Treasury yield was less than a full basis point lower week over week through Thursday, trading at 4.09% into the close. Through Thursday, the corporate bond index year-to-date total return was +4.10%.

 

 

Spreads are Tight, and for Good Reason

It has become a common refrain among some investors who are quick to shout from the rooftops about how tight credit spreads are, especially as spreads have been grinding lower for the past month.  The index is 22bps tighter since September 11 and the spread on the Corporate Index is at its lowest level since 2005.  First, we would remind investors that tight spreads are not limited to investment grade and that they are tight across the entire fixed income universe.  And why shouldn’t spreads be tight?  Stocks are at or near all-time highs.  The economy continues to hum along and a “soft landing” or “no landing” has become increasingly likely.  Most especially, if the economy takes a turn for the worse, the vast majority of investment grade rated companies are in little danger of delivering any type of permanent impairment to their bondholders.  This is not true in other sectors of the bond market like leveraged loans, junk bonds or private credit, all of which carry appreciably more credit risk for investors than the investment grade market.

Aside from a strong fundamental backdrop, there are also numerous technical factors that have been supportive of spreads.

  • The permanence of the foreign bid. Foreign investors are among the largest holders of US corporate bonds and while they haven’t been huge buyers in 2024, they also haven’t been sellers and have still been adding to positions at the margin.
  • Fund flows into the IG asset class have been roundly positive by all measurable sources. One source of fund flows that we track has shown positive inflows into IG funds in 36 of 42 weeks thus far in 2024.
  • Life and P&C insurance companies have been strong buyers of IG credit on the entire curve throughout 2024. Have you looked at your insurance bill lately?  Premiums are up sharply in recent years and insurance companies invest the majority of these funds into investment grade fixed income in order to pay future claims.
  • Pensions need to be rebalanced and many are fully funded. With equity markets having posted strong returns in recent years pensions must divert more funds to their fixed income allocations in order to balance their overall portfolios.  Also, there are many more pensions that are fully funded today relative to where they have been in the recent past –this leads the pension manager to take less risk, favoring asset classes like IG credit.
  • Lack of new issue supply in the final 10 weeks of the year could drive secondary spreads even tighter. It is well understood how strong corporate IG issuance has been thus far in 2024 but one of the reasons for this is the aforementioned demand factors.  It seems unlikely that issuance can sustain its torrid pace through year end and if in fact it does slow then this could be another technical that could drive spreads tighter.

Finally, the main reason that spreads are as tight is a rather simplistic one: it’s all about yield.  Many investors in the IG market are agnostic to the overall level of spreads and care much more about yield.  These investors use IG credit to solve a problem.  For example, they may have a liability coming due in 10yrs and they need a 5% annual return in a high-quality investment –there are many IG bonds that would satisfy that requirement.  Credit spread is simply a component of your overall yield when you invest in a corporate bond.  We have highlighted this throughout the year: the yield to maturity for the IG corporate bond index was 4.94% on Thursday afternoon.  The average YTM for the index the past 10yrs was 3.63%.  If you go back 20yrs that number was 4.16%.  Each investor has their own suitability requirements but we think IG credit at ~5% is undeniably attractive, especially considering how infrequently this type of compensation has been available in recent years.

Issuance

It was a solid week for issuance during the holiday shortened week as companies priced $25.8bln of new debt. However, this fell short of the top end of estimates that were looking for as much as $30bln.  Financial firms accounted for 100% of issuance this week which was widely expected by investors with banks hungry to issue debt on the back of earnings.  Many of the banks printed strong quarterly earnings reports which led to enthusiastic investor demand for their new debt.  We continue to expect issuance to slow over the next 17 days as the election draws nearer but syndicate desks are still looking for a respectable $20bln of issuance in the week to follow.

Flows

According to LSEG Lipper, for the week ended October 16, investment-grade bond funds reported a net inflow of +$2.17bln.  This was the 12th consecutive week where the asset class reported an inflow.  Total year-to-date flows into investment grade funds were +$62.7bln.

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.

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

 

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.

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 billionv. 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 11th consecutive week where the asset class reported an inflow.  Total year-to-date flows into investment grade funds were +$60.5bln.

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.

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

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.

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

 

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.

©Cincinnati Asset Management. All Right Reserved 2023.