Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.9 billion and year to date flows stand at $49.8 billion.  New issuance for the week was $1.8 billion and year to date issuance is at $286.1 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds rallied in the wake of the Fed’s shift to a more tolerant approach on inflation with the lowest-rated bonds in the CCC tier leading the way.
• The average spread over Treasuries for bonds in the Bloomberg Barclays CCC index tightened 5 basis points to 986 basis points more than Treasuries, the lowest since Feb. 27
• CCCs have gained 1.02% this week and 1.63% month-to-date, beating single Bs for the fourth straight month and BBs for the third time since April, according to data compiled by Bloomberg
• Junk bond investors returned to the asset class with an inflow of $1.9 billion into U.S. high yield funds for the week
• August issuance is likely close out at almost $53b, the second-busiest month on record, as the summer lull sets in
• September is shaping up to be a relatively busy month for junk bond sales, with at least one dealer estimating volume of $35b-$40b, higher than the usual $25b- $35b
• Junk-bond spreads tightened 3bps to a more than two-week low of +477bps. Yields fell to 5.39%

(Bloomberg)   Fed Seen Holding Rates at Zero for Five Years in New Policy

• The Federal Reserve looks likely to keep short-term interest rates near zero for five years or possibly more after it adopts a new strategy for carrying out monetary policy.
• The new approach, which could be unveiled as soon as next month, is likely to result in policy makers taking a more relaxed view toward inflation, even to the point of welcoming a modest, temporary rise above their 2% target to make up for past shortfalls.
• Fed Chairman Jerome Powell is slated to provide an update on the Fed’s 1-1/2-year-old framework review of its policies and practices when he speaks on Thursday to the central bank’s Jackson Hole conference, being held virtually this year because of the coronavirus pandemic.
• At their June meeting, all 17 Fed policy makers projected that the federal funds rate they target would remain near zero this year and next. And all but two saw rates staying at that level in 2022. Officials will provide updated quarterly forecasts at their meeting next month, including for the first time projections for 2023.
• “We’re not even thinking about thinking about raising rates,” Powell told reporters following the June meeting, in a memorable maxim that he’s repeated since.
• Eurodollar futures aren’t currently pricing any premium for Fed rate hikes until early 2023, with a full quarter-point increase priced in toward the end of 2023. Some traders, though, have viewed this as slightly too dovish, with demand emerging for hedges against a steeper path than is currently priced in for 2023 and 2024. Some see ultra-easy monetary policy eventually spurring inflation.
• In a sign of economic resilience, government data on Wednesday showed U.S. orders for durable goods rose in July by more than double estimates amid a continued surge in automobile demand, indicating factories will help support the rebound in coming months.
• The Fed held rates near zero for seven years during and after the financial crisis before raising them in December 2015. Former Fed Vice Chairman Alan Blinder doubts it will be that long this time, though he adds that he would have said the same thing when the Fed first cut rates effectively to zero in December 2008.
• “It’s perfectly conceivable it could take seven years” before rates are increased, given how difficult it’s been for the Fed to generate faster inflation, said former U.S. central bank official Roberto Perli, who is now a partner at Cornerstone Macro LLC.

(Bloomberg)  Powell’s Fed Shift Allows for Higher Employment and Inflation

• Federal Reserve Chair Jerome Powell unveiled a new approach to setting U.S. monetary policy Thursday in a speech delivered virtually for the central bank’s annual policy symposium traditionally held in Jackson Hole, Wyoming.
• The new approach will allow inflation and employment to run higher in a shift that will likely keep interest rates low for years to come.
• Following a more than year-long review, Powell said the Fed will seek inflation that averages 2% over time, a step that implies allowing for price pressures to overshoot after periods of weakness. It also adjusted its view of full employment to permit labor-market gains to reach more workers.
• “Maximum employment is a broad-based and inclusive goal,” Powell said. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”
• While the new strategy doesn’t target a specific rate of unemployment broadly or for certain demographic groups, it does give the central bank flexibility to let the job market run hotter and inflation float higher before taking action.
• Powell’s speech left the matter of how tactically they would aim for higher inflation for future Federal Open Market Committee meetings. With the new strategy in place, Goldman Sachs Chief Economist Jan Hatzius said he now expects “changes to the forward guidance and asset purchase program to come at the September” policy meeting.
• In the new statement on longer-run goals, the Fed said its decisions would be informed by its assessment of “shortfalls of employment from its maximum level.” The previous version had referred to “deviations from its maximum level.” The change de-emphasizes previous concerns that low unemployment can cause excess inflation.
• While expected, the announcement of the strategy shift came sooner than some thought. After first fluctuating on the news, U.S. stocks resumed their record-breaking rally and the Treasury yield curve steepened to the widest in two months as traders bet policy rates will remain locked near zero for even longer.
• “Powell is not only saying that they will be more patient in removing the punch bowl in the future, he has changed the recipe for the punch,” said Mark Vitner, senior economist at Wells Fargo & Co. “While the timing comes slightly earlier than had been expected, the Fed is far better served to under-promise and over-deliver, or deliver earlier in this case.”

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $47.8 billion. New issuance for the week was $12.7 billion and year to date issuance is at $284.3 billion.

(Bloomberg) High Yield Market Highlights

• The U.S. junk bond market is likely to round out the week on a quiet note as new issue activity winds down and no deals currently slated for Friday. Spreads have come under pressure after the deluge of deals, but overall have been relatively resilient.
• There has been some differentiation in performance by quality amid the modest widening in the past two weeks, Barclays Plc credit strategists led by Brad Rogoff wrote on Friday
• CCCs have posted gains of 0.6% so far in August, while BBs have lost 0.12%, according to data compiled by Bloomberg
• “Month-to-date, the lower-rated cohorts of the investment grade and high yield cash markets have outperformed as there appears to be a bid for higher-beta credits,” the strategists wrote
• Assuming that market volatility remains contained, that may continue
• Investors withdrew $0.1 billion from U.S. high-yield bond funds during the week, the first outflow in seven weeks
• The outflow may be due to “tourists” pulling cash after a strong run, according to Bill Zox, a high- yield bond portfolio manager at Diamond Hill Capital Management
• August issuance volume is $51.74 billion, the second biggest on record
• Travel software provider Sabre GLBL raised $850m from an upsized 5NC2 secured note after drawing orders of more than $3b and despite a downgrade from S&P Global Ratings
• The bond was part of a broader financing to help boost liquidity and get through virus-related disruptions to the industry
• The company’s Ebitda losses and decline in 2020 cash flow will be significant and likely lead to leverage staying above 10x, S&P wrote

(Bloomberg) Fed Minutes Show FOMC Backs Away From September Guidance Shift

• U.S. central bankers appeared to back off from an earlier readiness to clarify their guidance on the future path of interest rates when they met in July.
• “With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point,” according to minutes published Wednesday of the Federal Open Market Committee’s July 28-29 meeting, conducted via video conference.
• That’s a subtle change from the previous set of minutes indicating policy makers were keen to sharpen their so-called forward guidance “at upcoming meetings.” The FOMC next gathers on Sept. 15-16.
• Since the last meeting a number of Fed officials have indicated there is less need to offer new guidance so long as the coronavirus is significantly holding the economy back.
• Federal Reserve officials left interest rates unchanged near zero at the gathering and continued to buy Treasury and mortgage-backed bonds at a pace of about $120 billion a month: actions that were aimed at nursing the economy through the severe recession triggered by the coronavirus pandemic.
• Even as they ratcheted down the urgency of altering their guidance in the near term, policy makers continued to discuss the conditions that would merit an eventual rate increase. These included the possibility of pinning changes to the federal funds rate to an outcome on inflation or employment, as well as sharpening the language around asset purchases in terms of “fostering accommodative financial conditions and supporting economic recovery.”
• “Members agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term,” the minutes said.
• “Participants saw less improvement in the business sector in recent months, and they noted that their district business contacts continued to report extraordinarily high levels of uncertainty and risks,” the record showed.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$3.8 billion and year to date flows stand at $40.1 billion.  New issuance for the week was $17.8 billion and year to date issuance is at $248.3 billion.

(Bloomberg)  High Yield Market Highlights

• Borrowers are hitting the high-yield market in droves to refinance at some of the cheapest rates ever amid billions of inflows into mutual funds and ETFs.
• Investors poured almost $4 billion of cash into funds that buy U.S. high- yield debt during the week. That marks the eighth highest inflow for the asset class.
• “We expect strong technicals to prevail in the near-term, making a substantial sell-off unlikely,” Barclays Plc strategists led by Brad Rogoff wrote on Friday
• Year-to-date combined inflows of almost $40 billion from mutual funds and ETFs represents the highest annual inflow amount on record.
• Not every deal is flying off the shelf though. Western Global Airlines is said to have boosted the yield on its proposed $410m offering to 10.75% in a sign of tepid demand from investors
• Junk bonds are set to end the week with gains of 0.52%, the sixth consecutive week of positive returns and the longest winning streak since January
• Four deals for $3.7b priced Thursday to take the week’s volume to almost $18 billion, the most since mid-June and the second busiest week on record, according to data compiled by Bloomberg
• Issuance has been driven by refinancings, mostly from borrowers in the BB ratings band, with several selling debt at rates below 4%
• High-yield bonds with more than $91 billion outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months and signaling that the refinancing wave could continue
• The flood of deals put some pressure on spreads which widened 4bps to 476bps more than Treasuries. Yields rose 5bps to 5.27%

(Wall Street Journal)  Ford Selects ‘Car Guy’ as CEO To Revive Profit, Chart Future

• Ford Motor Co. plans to install Chief Operating Officer Jim Farley as its new CEO, putting the onus on the executive to produce the tangible results that eluded his predecessor Jim Hackett during his three-year run in the top job.
• The company said Tuesday that Mr. Farley, 58 years old, will succeed Mr. Hackett, 65, who is retiring on Oct. 1. Mr. Hackett will remain in an advisory role through next spring, the company said.
• Farley will be under pressure to quickly build on what he called a strong foundation left by his predecessor.
• In recent months, Ford has scrambled to borrow money as it burned through billions of dollars in cash. The company’s U.S. factories have recovered nearly to prepandemic levels, and the company signaled last week a third-quarter profit.
• Farley emerged in February as the leading contender to take over, when the former strategy chief and longtime marketing executive was elevated into the chief operating officer role. His promotion coincided with the sudden retirement of Ford’s president of automotive, Joe Hinrichs, who essentially had been serving as a co-No. 2 with Mr. Farley in what many viewed as a competition for the top job.
• Ford Executive Chairman Bill Ford Jr. said the CEO change has been planned for some time. He lauded Mr. Hackett for revamping Ford’s vehicle lineup, in part by shedding unprofitable sedans, and taking on a major revamp of Ford’s business outside the U.S. through a continuing, multibillion-dollar restructuring.
• He also described Mr. Farley as a “car guy” who understands the technological shifts disrupting the car business, from driverless cars to the influx of digital services into the cockpit.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$1.0 billion and year to date flows stand at $36.2 billion.  New issuance for the week was $5.7 billion and year to date issuance is at $230.4 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds yields are on track for the biggest monthly decline on record at 5.41%, according to data compiled by Bloomberg.
• Junk has returned 4.5% in July, the most for any month since April, the data show. A slower pace of issuance in July of around $25b and robust inflows have helped drive yields down
• Technicals should remain supportive, Barclays Plc strategists led by Brad Rogoff wrote in a note Friday
• Funds that invest in high-yield bonds saw inflows for the third straight week
• The calendar for Friday is likely to be light. Leviathan Bond and Western Global Airlines are marketing deals that are scheduled to price next week
• High-yield bonds with more than $93.9b outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months
• CCCs accounted for about a third of the week’s volume, according to data compiled by Bloomberg
• G-III Apparel group also priced a $400m deal at the tight end of talk after receiving orders of more than $900m
• Junk bond spreads closed at a five-month low of 491bps more than Treasuries. Yields fell to 5.41%, also a five-month low

(CNBC)  Fed holds rates steady, says economic growth is ‘well below’ pre-pandemic level

• The Federal Reserve held interest rates steady in a decision announced Wednesday that came along with a tepid outlook on the coronavirus-plagued economy.
• In a move widely expected, the central bank kept its benchmark overnight lending rate anchored near zero, where it has been since March 15 in the early days of the pandemic.
• Along with keeping rates low, the Federal Open Market Committee, which sets monetary policy, expressed its commitment to maintain its bond purchases and the array of lending and liquidity programs also associated with the virus response.
• “We are committed to using our full range of tools to support our economy in this challenging environment,” Fed Chairman Jerome Powell said.
• The post-meeting statement labeled the current state of growth as better than it was at the trough but still not up to par.
• “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year,” the statement said. “Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
• Markets reacted little to the news, with stocks mostly holding earlier gains and government bond yields mixed.
• “In short, this is a holding operation, pending developments with both the virus itself and fiscal policy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
• Officially, the FOMC kept its rate targeted in a range between 0%-0.25%, where it last was during the Great Recession. The statement said the rate would stay there until officials are “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
• “The path of the economy will depend significantly on the course of the virus,” the statement said.
• “It’s just such an important sentence, we decided it needed to be in our post-meeting statement,” Powell added during his post-meeting news conference. “It’s so fundamental.”

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.”

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.