Category: Insight

31 Jul 2020
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads took a breather this week and may finish the week a touch wider when it is all said and done.  The Bloomberg Barclays US Corporate Index closed on Thursday July 31 at 133 after closing the week of July 20-24 at 131.  Through Thursday, the corporate index has posted a year-to-date total return of +8.35%.  Rates have continued to grind lower over the course of the past two weeks and the 10yr Treasury is flirting with its lowest levels of 2020.

The high grade primary market was more active this week as borrowers brought just over $25bln in new debt to market.  According to data compiled by Bloomberg, $64.4bln in new debt was priced during the month of July which was underwhelming versus consensus estimates of $90-$100bln.  The primary market should continue to pick up in subsequent weeks as companies continue to report earnings, exiting blackout periods.

According to data compiled by Wells Fargo, inflows for the week of July 23-29 were +$10bln which brings the year-to-date total to +$92.9bln.

24 Jul 2020
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads look to finish the week tighter again as the grind lower continues.  The Bloomberg Barclays US Corporate Index closed on Thursday July 23 at 130 after closing the week of July 13-17 at 136.  The return on the corporate index keeps inching higher with a year-to-date total return of +8.28% through Thursday.  This week saw spreads move tighter throughout as we are now firmly in the midst of earnings season meaning supply has come to a standstill.  Additionally, dealer inventories are near historic lows which has made it a sellers’ market, with offerings few and far between.  Rates have continued to inch lower in recent weeks and the 10yr sits within 5 basis points of its year-to-date lows.

The high grade primary market was extremely quiet this week with just $6.6bln in new supply.  This is typical in the midst of summer and during earnings season but it is fair to say that it was even slower than expected given most dealer projections were pegging supply in the $15-$20bln range.  Issuance should be subdued again next week but could pick up in mid-August if the macro-tone remains friendly to issuers.

According to data compiled by Wells Fargo, inflows for the week of July 16-22 were +$11.1bln which brings the year-to-date total to +$82.7bln.

 

24 Jul 2020
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$4.3 billion and year to date flows stand at $35.2 billion.  New issuance for the week was $4.4 billion and year to date issuance is at $224.7 billion.

 

(Bloomberg)  High Yield Market Highlights

  • With 1.5% of returns, junk bonds are on their way to the biggest weekly gain since June 5. It also marks the fourth straight week of positive returns, the longest winning stretch since January.
  • Investors have propelled the four-week rally as U.S. high-yield funds continued to report inflows. An influx of $4.3b for the week is the third consecutive period of incoming cash and the 10th biggest on record
  • CCCs got a boost from the risk-on tone and are poised to post the biggest weekly gains in seven. With 1.64% returns, it’s the best asset class for the week in U.S. high yield. CCCs have outperformed BBs and single Bs which are expected to show gains of 1.52% and 1.46%, respectively
  • CCCs would be outperforming BBs and single Bs for the second consecutive week
  • Should the pace of the rally continue uninterrupted into next week, CCCs are set to outperform BBs and single Bs for the third straight month with 3.89% returns month- to-date
  • Yields and spreads snapped a six-day rally and rose 4bps to 5.59% and +504bps, respectively, as equities dropped more than 1% and oil prices fell almost 2%
  • Issuance slowed as earnings gained momentum with just three deals for $1.265b pricing on Thursday, taking the week’s volume to $4.4b and July to almost $19b
  • Barclays strategist Bradley Rogoff cautions in a note Friday that the markets are now through year-end spread targets and the next five months will see “plenty of risks,” though strong technicals may help avoid a substantial selloff in the short run
  • High-yield bonds with more than $81.4b outstanding are currently trading above upcoming call prices, making it attractive for issuers to redeem them in the next three months
  • Junk bonds may pause ahead of the weekend as stock futures edged lower amid escalating tensions between the U.S. and China with the risk-off tone appearing to hold

 

(CNBC)  Senate GOP, White House reach tentative $1 trillion pact to break coronavirus aid logjam

  • Senate Republicans announced Wednesday evening that they have “reached a fundamental agreement” with White House negotiators on how to move forward with a coronavirus relief bill.
  • After the third meeting this week, Sens. Richard Shelby, R-Ala., chair of the Appropriations Committee; Lamar Alexander, R-Tenn., chair of the Health, Education, Labor and Pensions Committee; and Roy Blunt, R-Mo., chair of the Rules Committee, emerged from the negotiating room with Treasury Secretary Steven Mnuchin and White House chief of staff Mark Meadows saying they are “completely on the same page” and “in good shape.”
  • The tentative framework comes amid tension in the party over how to respond to the coronavirus pandemic, which is forcing states to re-evaluate their plans to reopen and to address the growing numbers of cases and deaths.
  • The legislation remains fluid, and Senate Majority Leader Mitch McConnell, R-Ky., has indicated that he wants to keep the price tag at $1 trillion. Republicans aren’t all on the same page, as some have denounced the cost amid a soaring national debt. But the latest talks show some signs of breaking an intraparty logjam that has kept negotiations at a dead stop for weeks.
  • The new proposal will serve as a starting point for negotiations with Democrats, who have passed a $3.4 trillion bill in the House and have been pressuring the GOP to move quickly on new aid as COVID-19 cases and deaths rise in the United States.
  • Mnuchin told reporters Wednesday that negotiators agreed to provide Americans with another round of direct payments, which the administration has been pushing for weeks. The details, however, have yet to be settled upon.
  • Asked whether there is a consensus on an amount, Mnuchin said, “I’m not going to get into specifics right now, but there is an agreement.”
  • It isn’t clear at this point, however, whether the terms of the direct payments will mirror those of the initial package in March — which Democrats want in a future aid package.
  • While Republicans spent most of Wednesday floating the idea of a short-term extension of enhanced unemployment insurance benefits, the White House seemed to cool to the proposal.
  • “We’re really looking at trying to make sure that we have a comprehensive bill that deals with the issues,” Meadows told NBC News. “Any short-term extensions would defy the history of Congress, which would indicate that it would just be met with another short-term extension.”
  • The $600-a-week federal payment for jobless Americans is set to run dry at the end of the month, and with no extension, it could lag until Republicans come to a broader consensus.
  • And there was no agreement on a payroll tax cut, a top priority for the administration but for only a handful of Senate Republicans.
  • “We really are not in a position to talk any specifics,” Meadows said. “We’re going let Leader McConnell talk about that after he actually has a more thorough conversation with his senators.”
17 Jul 2020
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$1.0 billion and year to date flows stand at $30.9 billion.  New issuance for the week was $6.7 billion and year to date issuance is at $220.3 billion.

 

(Bloomberg)  High Yield Market Highlights

  • S. junk bonds have notched up the biggest gains in six weeks as investors pour more cash into the asset class and the pace of issuance slows.
  • Junk bonds spreads have tightened 39bps in the past week to 558bps more than Treasuries, the lowest in a month. The rally was fueled by “a slew of positive surprises on the economic front,” Barclays Plc credit strategists led by Brad Rogoff wrote in a note Friday. Yields dropped 42bps in the same period
  • As primary activity winds down for the week, a group of banks led by UBS Group AG is looking to refinance a short-term loan for auto-parts maker BBB Industries that they funded in April amid volatility in credit markets
  • The $240m secured junk bond that matures in five years may be sold as soon as Friday. Pricing discussions are for a yield of 10.25% to 10.5% including a discount
  • Norwegian Cruise Line Holdings followed in the footsteps of Carnival to revisit the junk bond market as the pandemic keeps ships at dock. It sold $750m of senior secured bonds, up from $675m earlier, with a yield of 10.25% that was reduced from earlier pricing discussions in the 10.5% area. Orders reached more than $1.9b
  • High- yield bonds with more than $61.5b outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months
  • Netflix announced its 2Q earnings and dashed all hopes of another bond offering this year saying, “we have sufficient liquidity to fund our operations for over 12 months. As a result, we don’t expect to access the debt markets for the remainder of 2020 and we believe our need for external financing is diminishing”
  • Netflix has come to the junk bond market every April and October since 2016
  • Junk bonds posted gains of 0.17% on Thursday, the second straight session of positive returns. They’ve gained 0.99% for the biggest weekly jump since June 5
  • Spreads and yields fell to about a four-week low of +558 and 6.16%, down 5bps and and 6bps, respectively

 

(Bloomberg)  Update on Fed Buying

  • The Federal Reserve has slowed down its purchase of corporate bonds as the functioning of markets has improved, to less than $200 million per day from around $300 million a day. It said that if market conditions continue to improve, it might slow its buying further, or perhaps even stop entirely. So far through July 8, the central bank has bought just $10.7 billion of corporate notes and related exchange-traded funds.
12 Jul 2020
Insight, Investment Grade Quarterly Josh Adams - Portfolio Manager 0 comment

2020 Q2 INVESTMENT GRADE COMMENTARY

What a difference a quarter makes. The investment grade credit market has experienced a reversal of fortune since the dark days of late March, with both spreads and returns rebounding smartly from the levels seen earlier this year.

The resumption of risk appetite led to a sharp tightening in spreads for the Bloomberg Barclays Corporate Index which closed the quarter 122 basis points tighter, moving to an OAS of 150 at the end of June versus 272 at the end of March. Spreads are still well off the lows that we saw in the first quarter of the year when the Corporate Index closed at 93 for several days in a row back in late January. Recall that tighter spreads lead to higher valuations for corporate bonds. Investment grade corporate bonds have also been a beneficiary of the increasing value of Treasuries as lower interest rates have provided a tailwind that has led to higher total returns for investment grade credit. The 10yr Treasury closed 2019 at 1.92%, 0.67% on March 31 and it saw little change in the second quarter, closing at 0.66% on June 30.

The reversal in returns is really something to behold, most especially the speed with which the move has occurred. The total return for the Bloomberg Barclays Corporate Index was as low as -10.58% on March 23, and since that time it has rallied all the way back, and then some, closing the second quarter at a year-to-date total return of +5.02%. This compares to CAM’s year-to-date gross total return of +4.89% for the Investment Grade Strategy. For context, the S&P 500 closed the second quarter with a year-to-date total return of -3.09%. CAM’s gross performance was 54 basis points better than the Corporate Index at the end of the first quarter but now trails the index by 13 basis points year-to-date. CAM’s modest under-performance year-to-date is largely a result of conservative positioning and our structural underweight to the lower rated BAA-portion of the investment grade universe. As is normally the case when markets snap back, the lower quality portion of the Corporate Index tends to outperform, so this caused CAM to give up some ground versus the benchmark.

Portfolio Construction in a Recession
The U.S. officially entered a recession in February according to the National Bureau of Economic Research.i So what does this mean for the way that we manage the portfolio? You may be surprised to find that our behavior has really only changed at the margins. Unlike an ETF or broad market mutual fund, we are looking to construct well diversified portfolios of individual bonds for our clients. Because we build separately managed accounts, our clients will know exactly what they own, in what quantity and its current valuation. No matter where we are in the economic cycle, we will always look to invest in companies that have the ability to manage through a downturn because past experience has taught us that there will always be a recession at some point, and usually when it is least expected. Cyclical sectors and industries tend to get hit the hardest in a recessionary environment and although we have some of this risk in the portfolio we are significantly underweight relative to the Corporate Index. And of course we always operate with a structural underweight on the lower echelon of riskier BAA-rated credit. If anything has changed with our behavior and thinking it is that we are cautious on businesses that have significant exposure to China as we believe that there is risk to U.S.-China trade that could manifest itself at any time.

What’s the Fed been up to?
The Federal Reserve has been quite active in its support of the corporate bond market. The Fed made its first foray into the market by dipping its toe into investment grade credit ETFs in mid-May and by mid-June the Fed had moved on to outright purchases of the individual bonds of 794 companies.ii What may prove to be interesting is where the Fed goes from here. When the original plans were announced on March 23, it was a bleak time for the capital markets. The credit markets were not functioning in a healthy manner and the fixed income ETF model had broken the very first time it faced stress. Since the Fed has made its announcement however, things have improved markedly and the market is back to behaving in a highly efficient manner.

The terms of the Fed’s current program allow it to purchase up to $250 billion of corporate debt on the secondary market. Per the most recent Fed release, it has just over $10bln in corporate bonds on its balance sheet, but the program expires on September 30, at which time the Fed will either hold the bonds it bought, allowing them to mature or it will sell them on the open market. At the current run rate of its purchases, the Fed will get nowhere close to $250 billion as the current rate implies less than $70bln in purchases per year. There are only 63 trading days between July 1 and the expiration date of the current program and it seems unlikely that the Fed’s pace of purchasing will accelerate to the point that it will be able to use almost $240bln of dry powder in just 63 trading days. So one of two things will happen: 1.) The Fed will continue to purchase bonds at its current run rate of less than $300 million per day which would put its balance sheet at approximately $29bln by September 30, less than 12% of its total $250bln capacity or 2.) The Fed will extend the expiration date of the program beyond September 30. We think that the second scenario seems the most likely and that the Fed may in fact not come anywhere close to approaching its $250bln capacity if it does not need to. If there is a spike in volatility then certainly the Fed can buy more but if things remain relatively calm, as they are now, then we believe that the Fed will continue to purchase bonds at or near the current run rate and it will reserve the right to purchase more beyond that only if it needs to do so in order to subdue fear within the markets. The market seems to be operating under the assumption that it is a foregone conclusion that the Fed will use the full amount of its facilities no matter what, but we simply disagree.

Keep on Rollin’
The new issue market has been highly topical this year as 2020 will assuredly smash the all-time issuance record which was $1.3 trillion in 2017. At quarter end, 2020 supply was running 98% ahead of 2019’s pace with $1,176.9bln in new corporate debt having been priced in the first half of the yeariii. So you may be wondering why are borrowers, in many cases extremely high quality ones with plenty of liquidity, rushing to borrow more debt? The answer really comes down to uncertainty. If the pandemic gets worse, if we don’t get a vaccine, if growth does not rebound as quickly as expected, these are all the types of questions that companies must ask themselves as they plan for the future. If a large global multinational can afford to borrow today at rates that are reasonably attractive relative to historical standards in order to shore up liquidity amid uncertainty then it is prudent to do so. As for opportunities in the new issue market, they still exist and we are still finding what we consider good value but the times of extraordinary opportunity that we saw in March and April are no longer with us for the time being. It could well be that those opportunities are, as we suspected at the time, the type that only come along once every decade or so.

Second Half Outlook
We believe valuations have recovered to the extent that pockets of volatility in the credit markets may now start to occur with more frequency. Immense demand has largely kept volatility at bay since the end of March, so that is really the wildcard. Individual credits will continue to trade choppy surrounding news on vaccines, virus case counts and the various failures and successes of “re-openings.” From a spread perspective, although spreads are significantly tighter from the widest levels, valuations are reasonably compelling. The spread on the index closed the quarter at an OAS of 150. This compares to the 5yr average of 131, the 10yr average of 141 and the average since 1988 inception of 134. We continue to find compelling opportunities in individual bonds through our bottom up research process.

The Federal Reserve has injected confidence into the fixed income markets. While the actions of the Fed were drastic and unprecedented they were also much needed. Words can hardly describe the extreme malaise that was occurring within the markets over the course of the trading days from March 9 through March 20, up until March 23, the day when the Fed announced its initial plans. A side effect of the confidence that the Fed instilled is that it has created an atmosphere of exuberance and has encouraged more risk taking by market participants. We are at odds with this feeling of euphoria as we believe that this is a great time to take less risk, not more. There are plenty of opportunities to take smart calculated risks by purchasing bonds of companies with solid balance sheets that can navigate an extended downturn in the economy. We have positioned the portfolio accordingly. Not only are we underweight BAA-rated credit but we are also underweight the energy sector and zero weight the leisure, gaming, lodging and restaurant industries, which are becoming correspondingly riskier by the day as the economic uncertainty wears on. We will continue to manage your capital in a prudent manner and we thank you for your continued 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.

i The Wall Street Journal, June 8, 2020 “Recession in U.S. Began in February, Official Arbiter Says”
ii The Wall Street Journal, June 28, 2020 “Automakers, Technology Firms Are Largest Components of Fed’s Corporate-Bond Purchases”
iii Bloomberg, June 30, 2020 “IG ANALYSIS US: June Ends in Top 6 With July Bringing $100B More”

12 Jul 2020
High Yield Quarterly, Insight Rich Balestra - Portfolio Manager 0 comment

2020 Q2 High Yield Quarterly

In the second quarter of 2020, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 10.18% bringing the year to date (“YTD”) return to -3.80%. The CAM High Yield Composite gross total return for the second quarter was 9.06% bringing the YTD return to -1.87%. The S&P 500 stock index return was 20.54% (including dividends reinvested) for Q2, and the YTD return stands at -3.09%. The 10 year US Treasury rate (“10 year”) was fairly subdued during the quarter finishing at 0.66%, down 0.01% from the beginning of the quarter. This is up from the record low of 0.54% posted in early March. During the quarter, the Index option adjusted spread (“OAS”) tightened 254 basis points moving from 880 basis points to 626 basis points. During the second quarter, each quality segment of the High Yield Market participated in the spread tightening as BB rated securities tightened 198 basis points, B rated securities tightened 213 basis points, and CCC rated securities tightened 495 basis points. Take a look at the chart below from Bloomberg to see a visual of the spread moves in the Index over the past five years. The graph really shows the speed of the spread move in both directions during 2020.

The Energy, Other Industrial, and Banking sectors were the best performers during the quarter, posting returns of 40.02%, 11.57%, and 10.77%, respectively. On the other hand, Transportation, Communications, and Utilities were the worst performing sectors, posting returns of -5.71%, 4.64%, and 5.47%, respectively. At the industry level, independent energy, midstream energy, oil field services, autos, and gaming all posted the best returns. The independent energy industry (48.69%) posted the highest return. The lowest performing industries during the quarter were airlines, transportation services, aerospace/defense, cable, and leisure. The airline industry (-14.88%) posted the lowest return.

The movement in the energy market was a major theme during the quarter. The energy sector bounce in the second quarter was a welcome sign after a disastrous first quarter punctuated by a Russia/Saudi dispute. A record move in the price of oil can be added to the list of records being made in 2020. In April, the front month oil futures contract actually went negative to the tune of -$37.63 per barrel. Naturally, this was more of a technical event and was unsustainable. The price was able to quickly move above the zero line and finished at just over $10 per barrel the very next day. Further improvements in the price throughout the rest of the quarter were helped by a Russia/Saudi agreement, Saudi making additional output cuts, a further OPEC extension of output cuts, and the reopening of economies after shutdowns.

During the second quarter, the high yield primary market posted a massive $129.7 billion in issuance. Many companies took advantage of the open new issue market to boost liquidity in order to navigate the pandemic. Issuance within Consumer Discretionary was the strongest with approximately 32% of the total during the quarter. The opening of the market was very encouraging to see after being effectively closed during the month of March. While we expect the issuance door to remain open, it is likely that the pace will slow during the third quarter of the year.

The Federal Reserve remained active during the quarter. They maintained the Target Rate to an upper bound of 0.25% at both the April and June meetings with all ten voting members approving. In mid-May the Fed started purchasing ETFs under their SMCCF program. Subsequently, the Fed made the decision to pivot from buying ETFs to buying individual corporate bonds.i This pivot does allow the Fed the ability to be more targeted in their impact. The individual bond purchases got under way during the third week of June. Therefore, there isn’t a lot of data available yet, but the Fed has accumulated $8.7 billion in corporate debt within a $9.6 trillion corporate debt market. The biggest takeaway is the Fed is watching the debt markets closely, and they are at the ready to continue supporting the market. Chairman Powell testified before Congress and stated “we feel the need to follow through and do what we said we’re going to do.”ii
Intermediate Treasuries decreased 1 basis point over the quarter, as the 10-year Treasury yield was at 0.67% on March 31st, and 0.66% at the end of the quarter. The 5-year Treasury decreased 9 basis points over the quarter, moving from 0.38% on March 31st, to 0.29% at the end of the 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. There is no doubt that economic reports are going to be quite noisy over the balance of 2020. However, the revised first quarter GDP print was -5.0% (quarter over quarter annualized rate), and the current consensus view of economists suggests a GDP for 2020 around -5.6% with inflation expectations around 0.8%.

Being a more conservative asset manager, Cincinnati Asset Management is structurally underweight CCC and lower rated securities. This positioning has served our clients well over the first half of 2020. As noted above, our High Yield Composite gross total return has outperformed the Index over the year to date measurement period. With the market so strong during the second quarter, our cash position was a drag on our overall performance. Additionally, the energy sector was a drag on our performance. Our credit selections within the energy sector had very strong returns. However, we maintained a quality focus in the sector and that left our credits trailing the broader energy sector. Alternatively, the communications sector was a benefit to overall performance. Our underweight positioning in the sector, as well as, our credit selections both contributed to the performance during the quarter. Finally, our credit selections within the consumer cyclical sector provided an overall benefit to performance.

The Bloomberg Barclays US Corporate High Yield Index ended the second quarter with a yield of 6.87%. This yield is an average that is barbelled by the CCC-rated cohort yielding 12.60% and a BB rated slice yielding 5.18%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), has come down nicely over the quarter to just above a reading of 30 from the March high of 83. For context, the average was 15 over the course of 2019. The second quarter had 26 issuers default on their debt. The trailing twelve month default rate was 6.19% and the energy sector accounts for almost half of the default volumeiii. This is up from the trailing twelve month default rate of 3.35% posted during the first quarter. Pre-Covid, fundamentals of high yield companies had been mostly good and will no doubt continue to be tested as we move through the second half of 2020. From a technical perspective, supply has been robust and fallen angels have added to the size of the high yield market. However, fund flows have been at record levels and the top 5 largest weekly fund flows on record all occurred during the quarteriv. High yield has certainly had trouble this year; however there has been a nice bounce during the second quarter and quality credits are performing as expected. For clients that have an investment horizon over a complete market cycle, high yield deserves to be considered in the portfolio allocation.

Even accounting for the rebound in the second quarter, the High Yield Market is still trading at elevated spread levels, and it is important that we exercise discipline and selectivity in our credit choices moving forward. We are very much on the lookout for any pitfalls as well as opportunities for our clients. The market needs to be carefully monitored to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis. It is important to focus on credit research and buy bonds of corporations that can withstand economic headwinds and also enjoy improved credit metrics in a stable to improving economy. As always, we will continue our search for value and adjust positions as we uncover compelling situations. Finally, we are very grateful for the trust placed in our team to manage your capital through such an unprecedented time.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

i JP Morgan June 29, 2020: “SMCCF Update”
ii Wall Street Journal June 28, 2020: “The central bank disclosed the names of 794 companies whose bonds it began purchasing this month
iii JP Morgan July 1, 2020: “Default Monitor”
iv JP Morgan July 1, 2020: “High Yield Bond Monitor”

10 Jul 2020
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$2.0 billion and year to date flows stand at $34.1 billion.  New issuance for the week was $5.8 billion and year to date issuance is at $213.5 billion.

 

(Bloomberg)  High Yield Market Highlights

  • S. junk bonds are headed for a second week of gains after investors poured money into retail funds following a retreat last week. Two deals are expected to price Friday, bringing the week’s tally to more than $8b.
  • Junk bond funds reported an inflow of $2b for the week, following a $5.5 billion exodus the week before
  • Junk bond spreads and yields came under pressure as equities slumped and oil prices fell
  • Spreads widened 8bps to close at +597 and yields jumped 7bps to 6.57%
  • The index posted a second day of losses, down 0.12%
  • Barclays’ strategist Brad Rogoff wrote on Friday that “the rising number of Covid-19 cases in the U.S. could potentially be a catalyst for another sell-off,” especially if states re-establish lockdowns. “The re-escalation of virus cases remain an overhang, potentially turning the V- shaped recovery into a W.”
  • Stock futures wavered on the fears and oil prices slid as the International Energy Agency warned that a jump in virus cases could derail the economic recovery

 

(Wall Street Journal)  Judge Orders Pipeline Shut Down, Citing Faulty Environment Permit

  • A federal judge ordered the Dakota Access pipeline to shut down by next month because it was improperly granted a key environmental permit, a major setback for operator Energy Transfer LP and the American shale-drilling industry.
  • S. District Judge James Boasberg in Washington ruled Monday that the pipeline, which has been carrying oil since 2017, should be turned off until the U.S. Army Corps of Engineers completes a new environmental-impact statement. That process is expected to take 13 months.
  • The ruling, which comes a day after the builders of the $8 billion Atlantic Coast Pipeline pulled the plug on that project, is the latest example of how difficult it has become for companies to get fossil-fuel conduits approved in the U.S. amid stiff opposition from environmentalists, landowners and Native American tribes.
  • It comes as the Trump administration’s efforts to fast-track pipelines and other energy infrastructure projects have faltered amid legal challenges. The ruling threatens to further create hardship for American shale drillers operating in the Bakken Shale region of North Dakota, which have been rocked this year by falling demand for oil due to the coronavirus pandemic.
  • “The Court does not reach its decision with blithe disregard for the lives it will affect. It readily acknowledges that, even with the currently low demand for oil, shutting down the pipeline will cause significant disruption to DAPL, the North Dakota oil industry, and potentially other states,” Judge Boasberg wrote.
  • Energy Transfer said it planned to pursue all available legal and administrative remedies to stop the pipeline from being shut down.
  • “We believe that Judge Boasberg has exceeded his authority in ordering the shutdown of the Dakota Access pipeline, which has been safely operating for more than three years,” spokeswoman Vicki Granado said.
  • The court had previously found the Army Corps in violation of the National Environmental Policy Act when it granted approval to build and operate part of the pipeline that runs under Lake Oahe, a reservoir on the Missouri River, which straddles North and South Dakota.
  • It said the Army Corps failed to produce a required environmental review.
  • Owners of Dakota Access had told the court that they could lose as much as $643 million in the second half of 2020 and $1.4 billion next year if the pipeline is shut down.
  • “There is no viable pipeline alternative for transporting the 570,000 barrels of Bakken crude that DAPL is capable of carrying each day,” the pipeline’s owners have said.
  • Judge Boasberg acknowledged his decision will have substantial impacts for the oil industry in North Dakota, which has been struggling this year with low prices due to the drop in demand caused by the virus.
  • “Yet, given the seriousness of the Corps’ NEPA error, the impossibility of a simple fix, the fact that Dakota Access did assume much of its economic risk knowingly, and the potential harm each day the pipeline operates, the Court is forced to conclude that the flow of oil must cease,” he wrote.

 

(Bloomberg)  Energy Transfer Isn’t Shutting Dakota Access Despite Ruling

  • Energy Transfer LP said it’s not making any moves to empty its Dakota Access oil pipeline after a judge on Monday ordered the conduit shut while a more robust environmental review is conducted.
  • The Dallas-based company run by billionaire Kelcy Warren said it’s also accepting requests for space on the pipeline in August. The U.S. District Court for the District of Columbia had ordered the pipeline to be drained by Aug. 5.
  • “We are not shutting in the line,” Energy Transfer spokeswoman Vicki Granado said in an email when asked if the company had begun emptying the pipeline. Judge James E. Boasberg “we believe exceeded his authority and does not have the jurisdiction to shut down the pipeline or stop the flow of crude oil.”
  • It’s the latest sign that Energy Transfer is preparing for yet another battle over the Dakota Access crude pipeline, which four years ago drew months of on-the-ground protests from environmental groups and tribes opposed to the project’s route across Lake Oahe, a dammed section of the Missouri River just a half-mile from the Standing Rock Indian Reservation in the Dakotas.
  • In Washington, energy lobbyists have mused that the shutdown order would be difficult to enforce, according to three people familiar with the discussions.
  • Height Securities LLC also predicts the unprecedented ruling to shut down Dakota Access because of a violation of the National Environmental Policy Act is unlikely to withstand review by the D.C. Circuit Court of Appeals, according to a research note for clients.
  • When asked whether Energy Transfer plans to defy Boasberg’s decision if it remains in effect Aug. 5, Granado reiterated that the company doesn’t think he has the authority to shut the line. She later said Energy Transfer’s decision to refrain from emptying the pipeline isn’t meant as an act of defiance, “rather a statement to say we are not in the process of shutting in the line and do not believe he has the authority to order this.”

 

(Wall Street Journal)  Buffett’s Bet Is a Midstream Buy Signal

  • After months of quiet browsing, Warren Buffett has finally found something worth buying.
  • Berkshire Hathaway on Sunday announced an agreement to buy Dominion Energy’s midstream energy business for $9.7 billion including debt as Dominion shifts its focus to utilities. The purchase is right in Mr. Buffett’s wheelhouse: an old, out-of-favor sector he knows well.
  • It probably is no coincidence that Dominion chose to unveil the deal alongside an announcement bidding farewell to its six-year-old Atlantic Coast Pipeline project, which it said faces too much regulatory uncertainty. Such concerns have dogged many high-profile projects. Notably, a federal court Monday ordered the Dakota Access Pipeline to shut down pending an environmental review.
  • The deal’s timing might show that Mr. Buffett sees a silver lining in the regulatory headaches: More barriers for new pipeline build-outs could mean better value for existing ones. The pace of pipeline build-outs has long lagged behind the production of oil and gas; even with reduced production recently, pipelines will likely have plenty of business going forward. The acquisition also includes a 25% stake in the only operating liquefied-natural-gas export terminal on the East Coast.
  • While caution is warranted, Mr. Buffett’s vote of confidence shines a light on the beaten-up sector’s value.
19 Jun 2020
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$1.3 billion and year to date flows stand at $35.2 billion.  New issuance for the week was $15.3 billion and year to date issuance is at $184.8 billion.

 

(Bloomberg)  High Yield Market Highlights

  • S. junk bond sales for June may top $45 billion by the end of Friday, making this one of the busiest months on record for issuance. Eldorado Resorts Inc. is expected to round out a busy week with billions of dollars of debt for its acquisition of Caesars Entertainment Corp.
  • The issuance surge comes even as junk bond spreads and yields have come under pressure amid stock volatility and fears of a fresh outbreak of the coronavirus
  • Spreads widened 16bps to 577bps more than Treasuries Thursday, yields rose 15bps to 6.42% and the index posted a loss of 0.33%
  • But Barclays Plc strategists led by Brad Rogoff see spreads grinding tighter with the economic recovery expected to be faster than in previous contractions and the bar for a new round of widespread lockdowns high
  • Stock futures are higher on a breakthrough in trade negotiations between America and China
  • Investors are still putting cash into high-yield funds, albeit at a slower rate, with an inflow of $1.3b for the week. This was the 12th consecutive week of inflows
  • The new issue market is still cranking out deals.

 

(Bloomberg)  Fed Will Begin Buying Broad Portfolio Of U.S. Corporate Bonds 

  • The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.
  • The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.
  • “This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”
  • The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

 

(Bloomberg)  Delta Air CEO Sees Hitting Break-Even Around Spring of Next Year

  • Delta Air Lines Inc. hopes to reach its break-even point by next spring as rising demand prompts the carrier to continue increasing flying capacity, Chief Executive Officer Ed Bastian said.
  • “We are in the process of recovery, there’s no doubt about it,” Bastian said Thursday on Bloomberg Television. “There are clear signs the momentum we have is meaningful and continuing to build.”
  • The Atlanta-based airline plans to add around 1,000 flights a day to its schedule in July and again in August, he said. U.S. airlines that had slashed flying have begun to put more planes in the sky as states lift stay-at- home orders and other limits on activity. Delta expects to operate about 30% of its year-earlier flying schedule by the end of September.
  • “We’re at 15% of revenues today and we hope to get to 30% over the next two or three months, keeping costs at that 50% level,” Bastian said in the interview, with David Westin. “I would imagine by the spring next year, we’d be at a point where we’re break-even.”
  • The U.S. Labor Day holiday in early September will be “an important milestone and pivot point” because it’s typically when business travel starts to build after summer, Bastian said.
  • Delta is on track to burn about $30 million in cash this month, better than its target of reducing the figure to $40 million from $100 million earlier in the pandemic, Bastian said.
  • He expects to reach zero by year-end. The airline has cut operating expenses by 55% since the coronavirus outbreak began to affect travel in March.
  • Bastian said he doesn’t expect widespreadlayoffs at Delta after Sept. 30, when prohibitions against job cuts that are part of federal financial aid expire. About 40,000 employees have taken voluntary leaves, the company said at its annual meeting later Thursday.
12 Jun 2020
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads are set to finish the week wider, giving back some of the big move tighter from last week.  The Bloomberg Barclays US Corporate Index closed on Thursday June 11 at 161 after closing the week of June 5 at 146.  The corporate index was a beneficiary of lower Treasuries and the total return for the year through Thursday inched higher to +4.10%.  This week saw spreads move modestly tighter on Monday followed by moves wider on Tuesday and Wednesday followed by a violent move wider on Thursday.  The tone was more positive on Friday with spreads moving tighter, recouping some of the move wider from the prior three days.  Rates moved lower throughout the week to the tune of about 10 basis points versus the week prior which saw a close on the 10yr Treasury of 0.895% vs sub-0.70% as we go to print.

The primary market saw its slowest week since early March with just over $25bln in new corporate bond issuance.  The Fed meeting on Wednesday and market rout on Thursday were the one-two punch that kept issuers at bay.  Supply is expected to pick-up again next week with preliminary expectations calling for $40-$50 billion of supply according to data compiled by Bloomberg.

According to data compiled by Wells Fargo, inflows for the week of June 4-10 were +$13.6bln which brings the year-to-date total to -$-12.7bln.  This extends the 10-week streak of inflows to $89bln+ for investment grade funds.

 

 

 

12 Jun 2020
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$4.4 billion and year to date flows stand at $29.5 billion.  New issuance for the week was $13.1 billion and year to date issuance is at $169.5 billion.

 

(Bloomberg)  High Yield Market Highlights

  • S. junk bonds may steady on Friday after spreads widened the most in seven weeks. But after a volatile few days, would-be borrowers may stay on the sidelines for now.
  • Spreads widened 46bps to 620bps over Treasuries on Thursday. They’ve widened almost 100bps since last Friday
  • Yields jumped 44bps to 6.84%, the biggest increase in almost 12 weeks, according to data compiled by Bloomberg
  • The pressure may ease with stock futures bouncing back after a dramatic sell-off spurred by concerns over a second wave of coronavirus infections and a slower-than-expected economic recovery
  • The primary market has remained open amid the turbulence, but the pace has slowed with just two deals sold Thursday.
  • Junk bond retail funds continued to see more inflows
  • Junk bonds posted a loss of 1.35% on Thursday, the biggest one-day loss in more than seven weeks. They’ve posted losses for three straight days, the first time that’s happened since the week of May 11

 

(Bloomberg)  Wall Street’s New Bond-Ordering System to Launch by End of Year

  • The joint venture between Wall Street’s biggest banks that’s looking to revolutionize the way new corporate bonds are marketed and sold plans to launch in the fourth quarter of 2020.
  • DirectBooks LLC — backed by Bank of America Corp., Barclays Plc, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. — will start by announcing new credit offerings on its platform, before enabling orders and allocations, according to Richard Kerschner, the company’s chief executive officer.
  • The platform is preparing to go live at a time when demand for the new service has arguably never been greater. U.S. and European investment-grade corporate bond sales each smashed through the trillion-dollar and euro marks at the fastest pace ever this year, highlighting the need for a digitized process to buy and sell new deals, Kerschner said.
  • Wall Street is looking to modernize the process of buying new corporate bonds that still relies on phone calls, instant messaging and emails to handle billions of dollars in orders.

 

(Bloomberg)  Fed Sees Zero Rates Through 2022, Commits to Keep Buying Bonds

  • The Federal Reserve pledged to maintain at least the current pace of asset purchases and projected interest rates will remain near zero through 2022, as Chairman Jerome Powell committed the central bank to using all its tools to help the economy recover from the coronavirus.
  • “We’re not even thinking about thinking about raising rates,” he told a video press conference Wednesday. “We are strongly committed to using our tools to do whatever we can for as long as it takes.”
  • The Federal Open Market Committee earlier said it would increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities “at least at the current pace” to sustain smooth market functioning.
  • A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.
  • “Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully.”
  • The Fed’s quarterly projections — updated for the first time since December, after officials skipped their March release amid the burgeoning pandemic — showed all policy makers expect the funds rate to remain near zero through the end of 2021. All but two officials saw rates staying there through 2022.
  • The economy faces “considerable risks” over the medium term, the Fed said in its statement, reiterating language from the last FOMC meeting in late April.
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