Insight – Page 7 – Cincinnati Asset Management

22 Oct 2023

Insight, Investment Grade Quarterly CAM Team 0 comment

COMENTARIO DEL TERCER TRIMESTRE

Los diferenciales de crédito con grado de inversión fueron más ajustados durante el tercer trimestre, pero los rendimientos de los bonos del Tesoro subieron, lo que actuó como un importante obstáculo para la rentabilidad. Durante el trimestre, el diferencial ajustado por opciones (Option Adjusted Spread, OAS) en el índice de bonos corporativos de EE. UU. de Bloomberg se redujo en 2 puntos básicos y llegó a 121 después de haber abierto el año con un OAS de 123. Las curvas de los bonos del Tesoro intermedio se inclinaron durante el período, con relativamente pocas variaciones en los bonos del Tesoro a 2 años, mientras que los rendimientos de los bonos del Tesoro a 5 y 10 años subieron significativamente. Las tasas más altas son malas noticias para los rendimientos a corto plazo, pero a largo plazo, la inclinación de la curva es algo que nos gusta ver, ya que crea un entorno más amigable para los inversores en bonos. Las curvas con pendiente positiva maximizan la eficiencia y el potencial de rendimiento de un bono que avanza hacia abajo en la curva de rendimiento a medida que se acerca al vencimiento.

El índice corporativo registró un rendimiento total de todo el trimestre de -3.09 %. La rentabilidad total neta de comisiones del programa de grado de inversión de Cincinnati Asset Management, Inc. (CAM) fue del -2.36 %. Los rendimientos totales el último año se mantuvieron positivos tanto para el índice como para el CAM hasta el final del trimestre.

Actualización de mercado

El rendimiento al vencimiento (yield to maturity, YTM) del índice Bloomberg U.S. Corporate cerró el trimestre en 6.04 %. Aquí hay algunas estadísticas para proporcionar contexto:

El YTM promedio a 5 años fue del 3.48 %. El índice cerró >6 % menos del 0.7 % de los días hábiles.
El YTM promedio a 10 años fue del 3.38 %. El índice cerró >6 % menos del 0.4 % de los días hábiles.
El YTM promedio a 15 años fue del 3.69 %. El índice cerró >6 % menos que el 5.2 % de los días hábiles.
El YTM promedio a 20 años fue del 4.12 %. El índice cerró >6 % menos que el 7.6 % de los días hábiles.

Con los rendimientos cerca de los máximos del ciclo y las situaciones fundamentales de las empresas en buena forma, creemos que el crédito IG ofrece una propuesta de valor atractiva. También creemos que la desventaja para la clase de activos es limitada debido a estos elevados rendimientos. Los rendimientos del Tesoro podrían subir a partir de aquí o podría haber un aterrizaje forzoso que podría ampliar los diferenciales de crédito, pero el impacto de esos movimientos en los rendimientos disminuye cuando el punto de partida es un rendimiento >6 %, lo que proporciona un colchón significativo para los inversores en bonos.

Creemos que los diferenciales de crédito estaban valorados de forma justa al final del trimestre. La OAS en el índice terminó el trimestre en 121 en relación con sus promedios de 5 y 10 años de 123 y 124, respectivamente. Los inversores son cautelosos respecto de la dirección de la economía estadounidense, por lo que creemos que podría resultar difícil un mayor ajuste de los diferenciales desde los niveles actuales. Sin embargo, existen un par de escenarios que podrían hacer que los diferenciales se ajusten más: 1.) La curva de rendimiento continúa aumentando hasta el punto de que ya no está invertida y/o 2.) La inflación continúa cayendo, coincidiendo con un aterrizaje suave para la economía de EE. UU. Existe también un tercer escenario, que contempla una falta de oferta de nuevos bonos hasta finales de año, lo que podría crear un desajuste entre la oferta y la demanda: si las nuevas emisiones son insuficientes para satisfacer la demanda de los inversores, entonces los diferenciales secundarios podrían reducirse en ausencia de datos económicos negativos. Por el contrario, los diferenciales podrían ampliarse si una política monetaria restrictiva lleva a la economía a una recesión. Creemos que el resultado más probable es que los diferenciales se negocien dentro de un rango relativamente estrecho hasta que haya más certeza entre los inversores sobre la dirección de la economía y las expectativas de inflación. En resumen, con rendimientos elevados del Tesoro y una compensación justa por el riesgo crediticio, creemos que el crédito con grado de inversión sigue siendo atractivo.

Asignación de activos: acciones frente a bonos

A lo largo de 2023, los bonos del Tesoro han subido más, mientras que las acciones han seguido avanzando, registrando rendimientos impresionantes. Esta acción del precio ha puesto de relieve el concepto de prima de riesgo de acciones (equity risk premium, ERP). La ERP es el rendimiento adicional que un inversor obtiene de las acciones en comparación con los bonos por asumir un riesgo adicional en el mercado de valores. Para decirlo en términos matemáticos, la ERP es la diferencia entre el rendimiento de las ganancias del S&P 500 y el rendimiento del Tesoro a 10 años. El siguiente gráfico de la ERP está expresado en términos de puntos básicos.

Actualmente, la ERP se encuentra en su nivel más bajo en cualquier momento de los últimos 20 años. ¿Fortalece esto el argumento a favor de los bonos con grado de inversión, que obtienen un diferencial superior a la tasa libre de riesgo? Creemos que sí, pero vale la pena señalar que la ERP puede volverse negativo; fue profundamente negativo durante un período prolongado durante el período de la burbuja de las puntocom de 1998 hasta principios de 2001.

El efectivo sigue siendo atractivo, pero no tanto

La pregunta más frecuente que hemos seguido recibiendo de inversores individuales durante el año pasado es algo como esto.

“Los rendimientos al 6 % me parecen fantásticos, pero ¿por qué debería asignarlos a bonos corporativos intermedios cuando puedo comprar un Tesoro a dos años al 5 % o un CD a 18 meses al 5.25 %?”

Para ser claros, creemos que los inversores deberían aprovechar la dislocación en el extremo inicial de la curva de rendimiento, pero no deberían hacerlo a expensas de sus objetivos a más largo plazo. Estas tasas altas a corto plazo son un fenómeno del ciclo de subidas de tipos de la Reserva Federal y la curva invertida podría disiparse rápidamente cuando la Reserva Federal cambie de rumbo. Un inversor que asigna en exceso al extremo inicial de la curva corre el riesgo de perder rendimientos mayores un poco más allá de la curva. El objetivo para la mayoría de los inversores debe ser asignar su cartera de manera que se beneficie de tasas altas a corto plazo y al mismo tiempo mantener una exposición a la parte intermedia de la curva de rendimiento para que la cartera pueda cosechar los beneficios de una curva que eventualmente se vuelve a empinar de su estado invertido actual. Un inversor que espere el primer recorte de tipos de la Reserva Federal o espere a que esta operación sea obvia podría perderse muchos frutos maduros en lo que a rentabilidad se refiere.

El tema del riesgo de reinversión sigue siendo de gran actualidad en nuestras conversaciones con los inversores. Comuníquese con uno de nuestros asesores de clientes si desea discutir esto más a fondo o si puede ver parte de nuestro contenido anterior aquí.

Curva de crédito corporativo: un juego de espera

La curva de crédito corporativo es parte integral de nuestra estrategia en CAM. El siguiente gráfico muestra la variación desde principios de año hasta finales del tercer trimestre tanto para la curva del Tesoro como para la curva de rendimiento corporativo. Nuestro enfoque en CAM está en vencimientos intermedios que van de 5 a 10 años.

Tanto las curvas corporativas como las del Tesoro han subido mucho en lo que va de 2023. Es importante señalar que, si bien la curva del Tesoro se ha mantenido invertida, la curva corporativa ha mantenido su pendiente. Por ejemplo, aunque la curva del Tesoro 5/10 se invirtió -4pb al final del trimestre, un inversor podría esperar ganar +21pb en rendimiento adicional (en promedio) al extender desde un bono corporativo a 5 años a un bono corporativo a 10 años. Esto equivale a una curva de crédito corporativo 5/10 de +25pb. Para nuestros inversores actuales, actualmente mantenemos algunos vencimientos más largos de lo habitual, ya que estamos esperando pacientemente a que la curva de crédito corporativo se intensifique. Una curva más pronunciada nos permite extraer más valor para nuestros inversores de las operaciones de extensión. A medida que el ciclo de ajuste de la Reserva Federal llegue a su conclusión lógica, esperamos un aumento tanto en la curva del Tesoro subyacente como en la curva de crédito corporativo. A medida que estas curvas se profundicen, los inversores que han estado con nosotros durante algún tiempo empezarán a vernos reanudar nuestras operaciones de extensión. El siguiente gráfico de la Reserva Federal de St. Louis ofrece un buen ejemplo de cuánto más pronunciada ha sido la curva de crédito corporativo durante la mayor parte de la última década en relación con su situación actual.

La Reserva Federal: ¿ya llegamos a ese punto?

La Reserva Federal aumentó los tipos un +0.25 % en su reunión de julio, pero mantuvo los tipos estables en su reunión de septiembre. La Reserva Federal se reúne dos veces más este año, el primer día de noviembre y nuevamente a mediados de diciembre. El gráfico de puntos del FOMC muestra una expectativa de un aumento más de +25pb este año y recortes de -50pb el próximo año. Al final del trimestre, los inversores asignaban una probabilidad del 39.1 % a una subida adicional de tipos para finales de año, según Fed Funds Futures.

El mensaje de la Reserva Federal ha sido coherente últimamente, recalcando el mantra de “más alto por más tiempo”. No creemos que sea especialmente significativo que la Reserva Federal suba las tasas una vez más, o incluso dos veces. En cambio, creemos que los inversores en bonos deben alegrarse ante la probabilidad de que la Reserva Federal finalmente esté cerca del final de su ciclo de subidas de tipos.

Seguir trabajando duro

Fue un trimestre para olvidar para los rendimientos del crédito IG, pero la propuesta de valor a largo plazo permanece. Incluso a pesar del movimiento masivo de los bonos del Tesoro, la clase de activos se ha mantenido en territorio positivo en el último año. Continuaremos administrando su capital lo mejor que podamos, buscando rendimientos superiores ajustados al riesgo en medio de un panorama cada vez más volátil. Gracias por su continuo interés y confianza.

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 proporcionada 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 hayan sido vueltos 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 tenencias 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.

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/.

20 Oct 2023

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

CAM Investment Grade Weekly Insights

Barring a stunning reversal, investment grade credit spreads will finish the week solidly wider. The Bloomberg US Corporate Bond Index closed at 129 on Thursday October 19 after having closed the week prior at 124. The 10yr is trading a 4.93% as we go to print Friday morning, higher by 32 basis points from the previous Friday close. Through Thursday, the Corporate Index YTD total return was -2.53%.

Economics

It was a mixed bag for economic data this week. The biggest surprise came on Tuesday which brought a Retail Sales print that defied expecations to the upside and painted a picture of a strong consumer that continued to spend in September. On the other hand, housing related data remained sluggish. Wednesday showed that US mortgage applications hit a 28-year low. This was not a surprise, as mortgage rates flirted with 8% during the week while Thursday saw the 10yr Treasury close at 4.99%, its highest level since July of 2007. Housing starts did show some signs of life, increasing by 7% during the month of September but overall homebuilder sentiment hit a 9-month low. It is clear that, although housing prices have remained resilient, higher mortgage rates are having an impact on the housing market as whole. Last but not least, WTI crude traded above $90 a barrel on Friday morning as traders fear war escalation in the middle east.

Issuance

It was a solid week for issuance, with banks leading the way, as the market digested $26bln in new supply. New issue concessions were near 12bps on average this week, which are higher than they have been for some time –we like to see this as investors. Next week, forecasts are calling for $15-$20bln of new debt, a more muted figure as companies continue to work through earnings.

Flows

According to Refinitiv Lipper, for the week ended October 18, investment-grade bond funds reported a net outflow of -$2.31bln. October has been a tough month for bond funds with $5.9bln in outflows so far. Flows for the full year are net positive +$18.2bln.

20 Oct 2023

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bond yields rose for the third day in a row to an almost 12-month high of 42%, driving losses for the fourth straight session on concerns over the Middle East conflict and the potential impact of “restrictive rates” on corporate balance sheets.
Yields rose and losses extended across the US high yield market. Junk bonds are headed toward ending the week with a loss of more than 1%. The week-to-date loss stands at 1.07%. Losses were reinforced after Federal Reserve Bank of New York President John Williams said on Wednesday that interest rates will have to stay at restrictive levels “for some time,” a day after stronger-than-expected economic reports.
BB yields soared for the fourth day in a row to a more than three-year high of 8.13%, driving week-to-date losses to 1.11%, the most since the week ended Feb 10, after steadily falling for four sessions this week.
Single B yields jumped to a new four-month high of 9.65%.
CCC yields surged to near 14% — closing at 13.81% driving Thursday’s loss to 0.42%, the sixth consecutive session of losses. The week-to-date losses are at 1.15%.
Fed Chair Powell said while the US central bank was inclined to hold interest rates steady, “decisions about additional policy firming and how long to stay restrictive will be based on totality of incoming data, evolving outlook, and the balance of risks,” signaling that the Fed was open to raising rates at least one more time should the data show strong resilience.
Economic data this week has been pretty robust. Thursday’s jobless claims data dropped to the lowest since January.
Economic growth projections have been revised upwards and recession odds reduced materially.
The economy probably expanded at an annualized 3.5% rate in the third quarter, the fastest in nearly two years as economists in the latest Bloomberg monthly survey marked up their estimates for gross domestic product.
Besides raising interest rates, the Federal Reserve is also shrinking its balance sheet, sending long term rates to their highest level. This will continue for another a couple of years, pushing rates higher, wrote Bill Dudley earlier this week.
Rising yields, renewed concerns about “restrictive rates” after robust macro data, and the eruption of tensions in the Middle East kept US borrowers away from the market. The primary market has priced a modest $6.7b month-to-date.
Central banks have broadly been emphasizing that rates will stay higher for longer, triggering investor worries that “something will eventually break” in credit markets, Goldman Sachs strategists including Lotfi Karoui and Ben Shumway wrote in a note.
Higher-for-longer rates would translate to a more persistent drag on growth from tighter financial conditions. The ability of corporate borrowers to adjust to this shift without a significant uptick in financial distress remains a key concern, the strategists wrote.
Goldman analysts revised their recommendation yesterday. They suggest investors should be underweight CCCs and overweight single Bs.

13 Oct 2023

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds snapped a five-day winning streak to post the biggest one-day loss in more than a week on Thursday. Yields soared for the second straight session to 9.10% after US consumer prices climbed for a second month, bolstering speculation that the Federal Reserve may keep the doors open for another interest-rate hike this year. After a run-up in US Treasury yields since the last Fed meeting in September, the path for monetary policy seems less clear, causing junk bond yields to spike.
Losses extended across the high-yield market. CCC- bond yields, the riskiest of junk bonds, rose 15 basis points on Thursday to 13.39%, driving a loss of 0.3%, snapping the four-day gaining streak.
Climbing yields and steady losses turned cautious investors away from the asset class. US high yield investors pulled $2.45b out of US junk bond funds for week ended Oct. 11, the third consecutive week of outflows.
Investors withdrew almost $7.5b in just three weeks – week ended Sept. 27, Oct. 4 and Oct. 11.
The recent rally began after the Fed officials reiterated earlier this week that the US central bank does not need to raise interest rates as the recent surge in yields did the job. Junk bonds may rebound from these losses as the market digests the recent assurance by Fed officials.
Federal Reserve Bank of Atlanta President Raphael Bostic reiterated earlier this week that the US central bank doesn’t need to keep raising interest rates unless inflation picks up again, or remains around its current pace.
Federal Reserve Bank of Boston President Susan Collins said the Federal Reserve was taking a more patient approach as rates are at or near their peak. She is the fourth Fed official to ease concerns about a further hike in interest-rates.
The minutes of the Fed meeting in September also noted that the risks for central bank are two sided, with overtightening and inflation both presenting potential problems.
The recent macro positive data and Federal Reserve signaling patience may keep spreads from widening further, Barclays wrote in a Friday note.
A 9% yield in the high yield market is an attractive level, and this may prevent spreads from widening materially, Barclays added.
The broader rebound earlier in the week lured US borrowers back to the market to take advantage of risk-on sentiment.
The primary market priced about $2b this week, driving the year-to-date supply to $136.4b.

(Bloomberg) Bonds Fall as CPI Boosts Fed-Hike Wagers

The so-called core consumer price index, which excludes food and energy costs, increased 0.3% last month. From a year ago, it rose 4.1%, the lowest since 2021. Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.4%, boosted by energy costs. Forecasters had called for a 0.3% monthly advance in both the overall and core measures.
While swap contracts continue to anticipate a Fed pivot to rate cuts next year, that outcome was assigned somewhat lower odds.
“Bottom line: the Fed can likely pause in November, though it’s a close call, and it remains too soon to consider cuts,” said Don Rissmiller at Strategas.
Yet some analysts and traders don’t think the report was surprising enough to move the needle, especially after a raft of Fed officials speaking this week said the rout in bond markets may suspend the need to tighten further for now.
Fed Governor Christopher Waller noted Wednesday the US central bank can watch and see what happens before taking further action with interest rates as financial markets tighten. Vice Chair Philip Jefferson on Monday said he would “remain cognizant of the tightening in financial conditions through higher bond yields.” And Dallas Fed President Lorie Logan indicated that if risk premiums in the bond market are on the rise, that “could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.”

08 Oct 2023

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

2023 Q3 High Yield Quarterly

In the third quarter of 2023, the Bloomberg US Corporate High Yield Index (“Index”) return was 0.46% bringing the year to date (“YTD”) return to 5.86%. The S&P 500 index return was -3.27% (including dividends reinvested) bringing the YTD return to 13.06%. Over the period, while the 10 year Treasury yield increased 73 basis points, the Index option adjusted spread (“OAS”) widened 4 basis points moving from 390 basis points to 394 basis points.

All ratings segments of the High Yield Market participated in the spread widening as BB rated securities widened 12 basis points, B rated securities widened 1 basis point, and CCC rated securities widened 10 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 414 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 Banking, Brokerage, and Other Financial sectors were the best performers during the quarter, posting returns of 3.18%, 2.56%, and 1.96%, respectively. On the other hand, Electric Utilities, Transportation, and REITs were the worst performing sectors, posting returns of -0.97%, -0.69%, and -0.46%, respectively. At the industry level, oil field services, cable, and independent energy all posted the best returns. The oil field services industry posted the highest return of 3.40%. The lowest performing industries during the quarter were office REITs, healthcare REITs, and health insurance. The office REITs industry posted the lowest return of -5.32%.

While there was a dearth of issuance during 2022 as interest rates rapidly increased and capital structures were previously refinanced, the primary market perked up a bit during each quarter this year. Issuance has remained low by historical standards as so much was pushed out by the large issuance during 2020 and 2021. Of the issuance that did take place during Q3, Energy took 21% of the market share followed by Discretionary at 17% share and Healthcare at a 12% share.

The Federal Reserve did lift the Target Rate by 0.25% at the July meeting but took a pause at the September meeting. There was no meeting held in August. This was the second rate pause, the first being June of this year, during the current 525 basis points hiking cycle that began in March of 2022. A few of the main takeaways from the September meeting and press conference: inflation is still too high, the job market is still too tight, the Fed is just about done with the rate hikes, the Fed remains data dependent but expects rates to stay higher for longer. “We’re fairly close, we think, to where we need to get,” Chair Powell said. “We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to our 2% goal over time,” Powell said at a press conference following the decision.ⁱ Inflation gauges are certainly off their peaks and moving in the proper direction. The most recent report for Core CPI showed a year over year growth rate of 4.3% down from a peak of 6.6% one year ago. Further, the most recent Core PCE growth rate measured 3.9% off the peak of 5.6% from February of 2022.

Intermediate Treasuries increased 73 basis points over the quarter, as the 10-year Treasury yield was at 3.84% on June 30th, and 4.57% at the end of the third quarter. The 5-year Treasury increased 45 basis points over the quarter, moving from 4.16% on June 30th, to 4.61% 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 2.1% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2023 around 2.1% with inflation expectations around 4.1%.ⁱⁱ

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, Index performance was once again tilted toward the lowest rated end of the market. Further, Index performance was heavily tilted toward short duration as all duration buckets over a three year duration underperformed. Our credit selections within the consumer sectors and aerospace/defense were also a drag to performance. Benefiting our performance this quarter were our overweights in banking and energy, and our credit selections in airlines and independent energy.

The Bloomberg US Corporate High Yield Index ended the third quarter with a yield of 8.88%. Treasury volatility, as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index), has picked up quite a bit the past couple of years. The MOVE has averaged 121 during 2023 relative to a 62 average over 2021. However, the current rate of 113 is well below the spike near 200 back in March during the banking scare. Data available through August shows 33 defaults during 2023 which is up from 16 defaults during all of 2022. The trailing twelve month dollar-weighted default rate is 1.86%.ⁱⁱⁱ The current default rate is relative to the 1.10%, 1.14%, 1.30%, 1.74% default rates from the previous four quarter end data points listed oldest to most recent. While defaults are ticking up, the fundamentals of high yield companies still look good. From a technical view, fund flows were negative in the quarter at -$1.8 billion and total -$27.9 billion YTD.^iv 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 data dependent Fed will continue to remain a large part of the story as 2023 works its way toward year end. The data will in fact continue to flow as Congress averted a government shutdown with a last minute agreement. Had the shutdown taken place, some of the data the Fed looks to would not have been available. In reality, Congress just kicked the can down the road to buy less than two months of additional time to work on a more substantial funding package. Adding to the current wall of worry are 10 year rates that are at 15 year highs, oil has ripped higher by $20 per barrel over the past three months, and cracks are seemingly starting to show for the US Consumer. Credit card delinquencies are at the highest level in more than a decade, and a recent report from Moody’s stated, “consumer debt quality is declining.” 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 September 20, 2023: Fed Leaves Rates Unchanged

ii Bloomberg October 2, 2023: Economic Forecasts (ECFC)

iii Moody’s September 15, 2023: August 2023 Default Report and data file

iv CreditSights September 28, 2023: “Credit Flows”

29 Sep 2023

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk-bond issuers inundated the primary market this month, driving the supply of new securities to almost $23 billion, the most since January 2022. Seven of the 19 sessions month-to-date priced more than $2 billion, resulting in some of the busiest days since June. The flurry of new issuance partly caused yields to rise closer to 9% and spreads to near 400 basis points.
US companies rushed to the debt markets to push off maturity payments, moving now in case the Federal Reserve’s plan to keep monetary policy tight pushes rates higher.
Amid the flood of new supply and worries the economy could slide into a recession due to the Fed’s moves, investors pulled $2.4b from US high-yield funds during the week ended Sept 27, the most since Feb. 22.
Yields rose and spreads widened across ratings this week.
Oil prices have been surging, fanning fresh inflation concerns. Moreover, US consumer confidence slumped to a four-month low, a report said on Tuesday, reflecting renewed worries about a recession. Federal Reserve Chair Jerome Powell signaled last week that borrowing costs will likely stay higher for longer after one more hike this year.
However, the primary market remained busy as companies capitalized on access to debt markets before investors get more cautious and discerning.
While total returns have been challenging across asset classes, higher yields should support the demand backdrop for credit, Brad Rogoff and Dominique Toublan of Barclays wrote in a note to clients.

22 Sep 2023

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads look likely to finish the week modestly tighter. The Bloomberg US Corporate Bond Index closed at 117 on Thursday September 21 after having closed the week prior at 118. The 10yr is trading a 4.47% as we go to print Friday morning, higher by 14 basis points on the week. Through Thursday, the Corporate Index YTD total return was +0.73%.

Economics

The biggest market moving event on the week was the Federal Reserve rate decision. As expected, The Fed elected not to raise its policy rate, but its hawkish messaging may finally have started to resonate with investors as both stocks and Treasuries sold off after Chair Jerome Powell’s press conference. We believe that a higher for longer rate environment is an opportunity for investment grade credit investors. The Fed could proceed with additional hikes from here but there is wide agreement among investors and the Federal Reserve itself that we are near the end of the current hiking cycle. Even if we make a conservative forecast and assume three additional rate-hikes, the impact simply wouldn’t be that meaningful when the current base rate is 5.5%. The 10yr Treasury closed at its cycle high of 4.49% on Thursday. With a Treasury of nearly 4.5% and a spread on the index of 117 new investors in our Investment Grade program are being compensated with a yield of >5.5% in a portfolio that has an index rating of A3 and a duration of around 7yrs. In other words, an investor is being well compensated without taking a lot of credit risk and without taking a lot of interest rate risk. If rates truly are “higher for longer” and simply trade sideways for a year or two then an investor will be compensated to wait for what comes next. Maybe the next step is a soft landing? In that scenario we could envision interest rates simply trading sideways and credit spreads would likely continue to perform well. Conversely, we could get a hard landing scenario or a scenario where there is a modest recession. In a recession scenario of any severity, the Fed is virtually guaranteed to cut its policy rate so an investor would benefit from lower rates although a recession usually means wider credit spreads –a scenario where total returns can actually be quite good for bonds if rate movement offsets spread movement. The point of these examples is to show that the IG credit investor has a lot of cushion right now in terms of all-in yield. There was a brief opportunity to put money to work in IG last fall with yields >6% and the market traded close to that level again this week. For context, compare that to the average yield to worst on the IG index for the last 10yrs of 3.36%.

Issuance

It was a light week for primary issuance which is not unusual for a Fed-week. Monday saw an active session with 11 companies pricing new debt but then activity fell off a cliff after that trading session. All told, weekly volume finished at $16bln. Next week, forecasts are calling for $15-$20bln of new debt.

Flows

According to Refinitiv Lipper, for the week ended September 20, investment-grade bond funds reported a net inflow of +$2.06bln. This is the largest weekly inflow for IG in since June 22. Flows for the full year are net positive +$25.9bln.

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.

22 Sep 2023

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds posted a loss of 0.5% on Thursday, the biggest one-day drop since July, as yields jumped to a roughly four-week high of 8.74% amid a decline in equities.
The losses spanned all high yield ratings after latest data showed that initial jobless claims dropped, suggesting that a resilient labor market will reinforce the Federal Reserve’s position of keeping rates higher for longer, fueling further increases in borrowing costs in the coming months.
The US high yield market is headed for the worst weekly loss since mid-August.
The week-to-date losses are at 0.71%, reversing last week’s gains.
CCCs, the riskiest part of the high yield market, were the worst performers on Thursday, with negative returns of 0.56%. CCCs are headed toward a weekly loss of 0.74%, the biggest in more than a month.
CCC yields have surged to four-week high of 13%, rising for last five sessions.
BB yields climbed to a 10-month high of 7.50%, after one-day loss of 0.52%.
US borrowers rush to the market amid uncertainty about the impact of rates remaining higher for longer. The week-to-date supply is almost $16b.
The high-yield pipeline is building up as companies try to borrow before yields rise further with the Fed’s higher-for-longer policy.
The current environment is favorable for credit, with high yields, above-trend growth, decent credit fundamentals, and positive technicals, Brad Rogoff and Dominique Toublan at Barclays wrote this morning.
They have revised their spread forecast for 2023 to 400-425 basis points from 475-500.
This implies that all-in yields will remain in the high 8% area for high yield, Barclays wrote.

(Bloomberg) Fed Leaves Rates Unchanged, Signals Another Hike This Year

The Federal Reserve left its benchmark interest rate unchanged while signaling borrowing costs will likely stay higher for longer after one more hike this year.
The US central bank’s policy-setting Federal Open Market Committee, in a post-meeting statement published Wednesday in Washington, repeated language saying officials will determine the “extent of additional policy firming that may be appropriate.”
Fed Chair Jerome Powell said officials are “prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”
The FOMC held its target range for the federal funds rate at 5.25% to 5.5%, while updated quarterly projections showed 12 of 19 officials favored another rate hike in 2023, underscoring a desire to ensure inflation continues to decelerate.
“We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to our 2% goal over time,” Powell said at a press conference following the decision.
He emphasized the Fed will “proceed carefully” as it assesses incoming data and the evolving outlook and risks, echoing remarks he made at the Fed’s annual symposium in Jackson Hole, Wyoming last month.
“We’re fairly close, we think, to where we need to get,” Powell said.
Fed officials also see less easing next year than they expected in June, according to the new projections, reflecting renewed strength in the economy and labor market.
They now expect it will be appropriate to reduce the federal funds rate to 5.1% by the end of 2024, according to their median estimate, up from 4.6% when projections were last updated in June. They see the rate falling thereafter to 3.9% at the end of 2025, and 2.9% at the end of 2026.

15 Sep 2023

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds are coming off the biggest one-day gains in more than two weeks despite a surge in new debt sales, pushing the market toward a modest 0.31% gain for the week after advancing in three of the last four sessions.
The gains lured US borrowers into the market, crowding the primary calendar and pushing the week’s supply tally to almost $10b, the most since November 2021.
The positive returns extend across all high-yield ratings groups, with CCCs, the riskiest segment, on track to be the best performing for the week after gaining for six straight sessions. The week-to-date gains are at 0.75% vs 0.16% for BBs and 0.37% for single Bs.
US companies are rushing to take advantage of current risk-on sentiment and stable market as they look to get ahead of any further increases in cost of debt as central banks embrace a higher-for-longer regime.
Leveraged credit companies have capitalized on the recovery in primary markets to address the wall of maturing debt, Morgan Stanley’s analysts Vishwas Patkar, Joyce Jiang and Karen Chen wrote this morning.
2024 maturities across high-yield bonds and loans have dropped by 50% to about $70b, while 2025 maturities have declined by 34% to about $164b, Morgan Stanley wrote.
Across the high-yield market, the reduction in maturities has been broad-based across ratings and sectors, whereas in loans, the B3/lower cohorts have lagged, now comprising a major share of what’s due in 2024, they wrote.
As junk bonds recovered from last week’s losses, CCC yields dropped to a two-week low of 12.69%. Yields fell across the risk spectrum. The broader high yield index yields also fell to a two-week low of 8.48%.

(Bloomberg) US Core CPI Picks Up, Keeping Another Fed Hike in Play This Year

Underlying US inflation ran at a faster-than-expected monthly pace in August, leaving the door open for additional interest-rate hikes from the Federal Reserve.
The so-called core consumer price index, which excludes food and energy costs, advanced 0.3% from July, marking the first acceleration since February, Bureau of Labor Statistics data showed Wednesday. From a year ago, it increased 4.3%, in line with estimates and marking the smallest advance in nearly two years.
Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure rose 0.6% from the prior month, the most in over a year and reflecting higher energy prices. Gasoline costs accounted for over half of the advance in the overall measure in August, according to BLS.
The report adds to concerns that the renewed momentum in the economy is reigniting price pressures. While Fed officials have been growing more optimistic they can tame inflation without a recession, a reacceleration in price growth could force them to push interest rates even higher — with the risk of sparking a downturn in the process.
The CPI is one of the last major reports the Fed will see before its meeting next week, in which policymakers are largely expected to hold rates steady. Chair Jerome Powell said last month interest rates will stay high and could rise even further should the economy and inflation fail to cool.
For most Americans, household budgets are still under strain. Energy costs broadly rose, especially gasoline, which rose more than 10% last month. Utility costs also increased. Grocery prices also rose, but at the slowest annual pace in two years.
While inflation expectations have remained stable and the job market largely resilient, Americans are growing more pessimistic about the economy. Prices, especially for essentials, are still elevated, which has forced many to rely on credit cards or savings to support spending.

15 Sep 2023

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads drifted a touch wider mid-week before settling into a level that was mostly unchanged as we went to print on Friday. The Bloomberg US Corporate Bond Index closed at 119 on Thursday September 14 after having closed the week prior at 119. The 10yr was trading at 4.30% Friday morning, higher by 4 basis points on the week. Through Thursday, the Corporate Index YTD total return was +1.76%.

It was one of the busier weeks for economic data that we have experienced in some time. Monday and Tuesday where quiet before things picked up on Wednesday with August CPI that came in hotter than expected, although more than half of the increase in the numbers was attributable to gasoline. On Thursday, Retail sales came in significantly higher than expected but also due in part to some help from fuel prices. The control-group sales were much softer. Like much of the economic data we have received throughout 2023, there were tidbits that fit the narrative of those in both the soft and hard landing camps. Also on Thursday, the ECB delivered its 10^th and likely final rate hike: “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” Finally, on Friday there was some good news in the U.S. as inflation expectations fell to the lowest level in over two years, with respondents seeing cost increases of +2.7% over the next five to ten years. Next Wednesday, all eyes will be on the FOMC. Most economic prognosticators expect that the Fed will keep rates steady. The Fed’s dot plot shows one more increase at its November meeting but economists surveyed by Bloomberg think that the Fed will forego this final increase.

There was $34bln of new issuance on the week, which we would typically classify as a fairly busy week. However, most of the supply this week, and for the month of September, has been somewhat niche-like in nature, failing to satisfy broader investor demand. This month has seen a dichotomy of issuers with many smaller one-off issuers and then also a mix of serial issuers that tap the market frequently. As a result, we believe that the month-to-date supply figure of $90bln is somewhat misleading. Even though the actual dollar volume of supply has been solid thus far it has left many investors hungry for more because it hasn’t been the right fit for many market participants. Next week should see an additional $15-$20bln of supply based on street estimates, a subdued figure relative to the past two weeks due to the FOMC meeting on Wednesday.

According to Refinitiv Lipper, for the week ended September 13, investment-grade bond funds reported a net inflow of +$233mln. This is the first weekly inflow for IG in 4 weeks but flows for the full year are a net positive +$23.8bln.

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