Insight – Page 9 – Cincinnati Asset Management

22 Dec 2023

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

The fourth quarter US junk bond rally spurred by the Federal Reserve drove yields further down to a new 16-month low of 7.69% and spreads to a another 20-month low of 329 basis points accelerating gains in CCCs, the riskiest tier of the junk bond market.
CCC yields tumbled to a 10-month low of 12.26% and spreads closed at a 19-month low of 787 basis points.
CCCs amassed gains of almost 19%, the best year since 2016. The fourth quarter returns so far stand at 5.95%, on track to be the biggest quarterly gains since December 2020.
CCCs are the best asset class in the US fixed income market as they outperform single Bs, BBs and investment grade.
Bloomberg Economics expects that the Fed will lead the way with 125 basis points of cuts over the course of 2024, Tom Orlik wrote on Tuesday.
After the Fed’s own quarterly projections indicated that the central bank will lower interest rates by 75 basis points next year, yields and spreads dropped across all ratings in the US high yield market.
BB yields dropped to a new 10-month low of 6.41%. Yields have fallen 158 basis points since the November Fed meeting and 59 basis points so far this month. Spreads were at 205 basis points, down 90 basis points year-to-date after falling 120 basis points so far this quarter.
The rally drew both borrowers and investors into the market, spurring new bond sales.
The primary market is expected to be largely quiet ahead of the holidays.
Forecasts for junk-bond supply in 2024 generally range from around $200 billion to $230 billion.

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 Dec 2023

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

CAM Investment Grade Weekly Insights

Credit spreads will finish the week a touch wider but levels remain near the tights of 2023. The Bloomberg US Corporate Bond Index closed at 102 on Thursday December 21 after having closed the week prior at 100. The 10yr is trading a 3.895% as we go to print Friday afternoon, which is only a single basis point lower from its close the week prior. Through Thursday, the Corporate Index YTD total return was +7.95%.

Economics

It was another heavy week of economic releases. The most meaningful print of the week was Core PCE on Friday. Recall that this is the Fed’s preferred inflation gauge. The release showed that PCE rose by a mere 0.1% in November. The full year release showed that underlying inflation advanced by 3.2% over the course of the past 12 months while the six month annualized number showed that the core metric rose by just 1.9%. According to sources compiled by Bloomberg, this is the first time in more than three years that this six month measure came in below the Fed’s 2% target.

Issuance

Issuance was extremely light on the week coming in at $0.7bln as just one issuer priced a single 5yr tranche of debt on Monday. January sales are expected to be robust with underwriters predicting monthly volume of around $160bln. The first week of business in 2024 is likely to be quite busy so long as funding conditions remain favorable. For context, the first week of 2023 saw issuers price almost $60bln in new debt.

Flows

According to Refinitiv Lipper, for the week ended December 20, investment-grade bond funds reported a net inflow of +$1.6bln. Flows for the full year are net positive +$13.4bln.

15 Dec 2023

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

CAM Investment Grade Weekly Insights

Credit spreads will finish the week on a strong note after closing Thursday evening at their tightest levels of 2023. The Bloomberg US Corporate Bond Index closed at 99 on Thursday December 14 after having closed the week prior at 105. The 10yr is trading a 3.947% as we go to print Friday morning, which is a 28 basis point move lower from its close the week prior. Through Thursday, the Corporate Index YTD total return was +8.13%.

Economics

It was an action packed week for economic releases but nothing impacted the market more than the FOMC and Chair Powell’s press conference on Wednesday. The Fed was meaningfully more dovish than expected in its messaging and risk assets were happy to take it and turn it into a rally for both stocks and bonds. We were surprised that Chair Powell did not take the opportunity to push back against easing financial conditions; the updated dot plot showed that the consensus view of the committee is now looking for three rate cuts in 2024 instead of two. What seems to be missing in much of media commentary surrounding this Fed release is that, while the dot plot is reasonably accurate over short time horizons of 3-6 months, it has been consistently wrong in its ability to predict where rates will be over 1 or 2 year time horizons. Investors should think of the dot plot as a chart that shows where a majority of the committee members “hope” rates will be in a year or two. Additionally, while rate cuts sound great in principal it is important for investors to remember that we have come a long way in a very short period of time which increases the risk that something in the financial system will go awry (even more so than it already has). Fed Funds today are +525bps and at their highest level in 22 years. If the Fed delivers 3 cuts in 2024 amounting to a total of 75bps we are still dealing with a 450bps policy rate that is meaningfully higher than it was at any point in the past two decades. Our view remains that a higher-for-longer policy rate will eventually cause a “landing” that is not entirely soft in nature, although the timing of a recession remains extremely difficult to predict. We also do not believe that a modest recession is necessarily a bad thing. We believe that the Fed simply has to engineer some softness in the labor market in order to adequately tame inflation. While there has been progress on the inflation front and there has been some modest softening of the labor market, average hourly earnings have remained strong and the unemployment rate is still exceptionally low. Bottom line, the Fed still has more work to do and Federal Reserve Bank of New York President John Williams wasted little time on Friday morning when he pushed back against market participants, saying it’s too early for officials to begin thinking about cutting rates as soon as March:

“The market in a way is reacting very strongly, maybe more strongly, than what we are showing in terms of our projections.”

Issuance

Issuance was underwhelming this week as borrowers priced just under $2.5bln of new debt. December volume stands at $23bln which is a decent haul for a seasonally slow month. There is a chance that there could be some light issuance next week but in all likelihood the new issue calendar is close to being done for the year.

Flows

According to Refinitiv Lipper, for the week ended December 13, investment-grade bond funds reported a net outflow of -$550mm. Flows for the full year are net positive +$11.8bln.

15 Dec 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 plunged to a 10-month low and spreads dropped to a 20-month low after the Federal Reserve paused the most aggressive policy of raising interest rates for the third time in this week’s meeting, while also forecasting a series of rate cuts next year. Yields closed at 7.77% and spreads at 334 basis points. Junk bonds are headed for the fifth straight week of gains, with 1.95% returns week-to-date.
The broad rally in high-yield bonds on news of the Fed pivoting to rate cuts spurred CCCs — the riskiest of junk debt — to post the biggest one-day gains in three years, with returns of 1.6% on Thursday. CCC yields tumbled 67 basis points to 12.37%, also a 10-month low. The demand for yield is not abating, Brad Rogoff and Dominique Toublan of Barclays wrote Friday morning.
The rally in junk bonds, powered by a resilient economy and easing financial conditions, got further impetus from the Fed’s summary of economic projections. The central bank revised the growth forecast for 2023 to 2.6% from 2.1% it estimated in the September report.
The Fed’s own quarterly projections showed it expects to lower rates by 75 basis points next year, a sharper pace of cuts than indicated in September.
Bloomberg Economics expects rate cuts as early as March of next year.
Gains in the US high-yield market were seen across ratings. Strong demand for credit to continue in the near-term, helping spreads grind tighter, Rogoff and Toublan wrote.
The broader high-yield index racked up returns of 1.24% at close on Thursday.
BB yields dropped 28 basis points to a 10-month low of 6.45% and spreads closed near a two-year low of 206 basis points.
Single B yields fell 32 basis points to 7.72%, a 16-month low.
Strong risk appetite, falling yields and spreads, and steady economic growth brought US borrowers into the market, driving new bond sales to $12b so far this month, already more than five times that of Dec. 2022.
Issuance was predominantly for refinancing bonds and term loans.
Most new sales priced at the lower end of price talk and drew orders of about three times the size of the offering.
US junk bonds are poised to extend the rally on a broad risk-on sentiment after Chair Jerome Powell reinforced market expectations of a pivot to rate cuts.

08 Dec 2023

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

CAM Investment Grade Weekly Insights

Credit spreads are poised to finish the week modestly wider. The Bloomberg US Corporate Bond Index closed at 106 on Thursday December 7 after having closed the week prior at 105. The 10yr is trading a 4.23% as we go to print Friday morning, just 3 basis points higher than its close the week prior. Through Thursday, the Corporate Index YTD total return was +5.59%.

Economics

The most meaningful data release just occurred this Friday morning with the November payroll report. It was a strong report that showed that the economy added more jobs than consensus estimates while the unemployment rate ticked lower to 3.7%. Traders had become increasingly more aligned in the belief that Fed rate cuts were eminent in the first half of 2024. This print along with continued labor market resilience in the future could bring the higher-for-longer narrative back to the forefront. Indeed, Treasury yields inched higher across the board after the NFP release. The 2yr was higher by 9bps as we went to print while the 30yr was higher by 5bps. Next week is the last big week of the year for economic data with CPI on Tuesday, the final FOMC rate decision of 2023 on Wednesday and retail sales data on Friday.

Issuance

It was a seasonally strong week of issuance as borrowers priced more than $20bln of new debt, eclipsing the high end of the estimated range. Next week syndicate desks are looking for $10bln in volume with most of that occurring on Monday.

Flows

According to Refinitiv Lipper, for the week ended December 6, investment-grade bond funds reported a net inflow of +$633.3mm. Flows for the full year are net positive +$12.3bln.

01 Dec 2023

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

The broad November rally in risk assets propelled CCCs, the riskiest tier of the junk bond market, alongside equities, to post the biggest monthly returns since January of this year. CCC yields plunged 125 basis points in November, also the most in 10 months, to 13.50%, driving gains of 4.53%.
The broad surge across risk assets was fueled by a market consensus that the Federal Reserve was finished with the most aggressive tightening cycle in decades and that it will begin to ease monetary policy by the middle of 2024. Junk bond spreads dropped to a 10-week low of 370 basis points, after falling 67 basis points in November, the biggest monthly decline in five months.
The rally came as the 5- and 10-year Treasury yields dropped by about 60 basis points each during the month of November to close at 4.27% and 4.33%, respectively. Treasury yields plunged from near 5% on Oct. 19
US junk bonds racked up gains of 4.53%, the largest in a month since July 2022, fueled by BBs. Yields fell 106 basis points to 8.43%, also the biggest monthly decline in 16 months
BBs had the best performance in 16 months, with returns of 4.6% reversing the three-month losing streak as rates tumbled
Yields crashed by 99 basis points to close near a four-month low of 7%, the biggest monthly decline in over a year
Resilient growth, cooling inflation and a softening labor market gave a strong impetus to the November rally, luring investors and US borrowers from the sidelines
November is the fourth busiest month for issuance as volume surged to $19.4 billion, more than double October’s total of $9.45 billion
US junk bond funds were inundated with new cash as investors poured more than $11b in November
Year-to-date supply stood at $163 billion, up by about 60% from 2022’s $102 billion
Forecasts for junk bond supply in 2024 range from $200 billion to $230 billion, with the exception of BofA, which estimates gross supply to be around $165 billion, a 5% drop from its projection of $175 billion for 2023

01 Dec 2023

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

CAM Investment Grade Weekly Insights

Credit spreads will finish the week tighter and are currently at their tightest levels of 2023. The Bloomberg US Corporate Bond Index closed at 104 on Thursday November 30 after having closed the week prior at 109. The 10yr is trading a 4.29% as we go to print Friday morning, 18 basis points lower than its close the week prior. Through Thursday, the Corporate Index YTD total return was +4.01%. The month of November was particularly strong for spreads as the index has moved 25 basis points tighter since the end of October. The performance of the rates market was also strong as Treasuries’ November gain was the largest since 2008.[i] Monthly yield changes for UST benchmarks were as follows:

2Y -41bp
5Y -59bp
10Y -60bp
30Y -60bp

Economics

The calendar for economic data was reasonably busy this week. The biggest print of the week is debatable but it was probably initial jobless claims on Thursday which came in exactly in line with expectations. Jobless claims have been top of mind ever since the October NFP report that missed expectations to the downside. There were other meaningful releases during the week, but none of the numbers were out of consensus enough to take the market by surprise: New Home Sales, Consumer Confidence, Core PCE, Personal Consumption, and Personal Income. Not to be lost in the shuffle was Thursday’s 3Q US GDP release that showed the economy grew at a 5.2% annual rate at the end of that quarter. While this is backward looking data, it is a long way from a recessionary GDP release. The first half of next week is pretty light but the action starts to pick up on Thursday with jobless claims and then the November NFP report on Friday morning.

Issuance

It was a solid week of issuance as borrowers printed $17.5bln of new debt which was the midpoint of the estimated range. Next week syndicate desks are looking for $15-$20bln of new issue volume. In all likelihood the first week of December will be the busiest week of the month before the primary market starts to slow as the calendar moves closer to the holidays and year-end.

Flows

According to Refinitiv Lipper, for the week ended November 29, investment-grade bond funds reported a net inflow of +$324.8mm. Flows for the full year are net positive +$12.357bln.

[i]Bloomberg, December 1 2023, “Treasuries’ November Gain Biggest Since 2008: Rates Monthly”

17 Nov 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 headed for weekly gains as yields dropped 18 basis points week-to-date to 8.75% as of Thursday, after 5-year and 10-year US Treasury yields sank below 4.5%, falling about 19 basis points each. Yields fell below 9% and spreads below 400 basis points since the Federal Reserve signaled, after its meeting on Nov. 1, that it was likely finished with the most aggressive rate-hike campaign in decades.
Economic data reports this month have shown a softening labor market with a rise in jobless claims, combined with cooling inflation and an unexpected decline in prices paid to US producers, which have all reinforced market consensus that interest rates were sufficiently restrictive.
Resilient growth combined with falling yields lured more investors into the asset class for the second consecutive week as retail funds were inundated with new cash. US high-yields funds reported a cash intake of $4.55 billion for week ended Nov. 15, after an inflow of $6.26 billion in the previous week, the third biggest on record.
The combined inflow of more than $10b in the last two weeks is the largest two-week intake for these funds since June 2020, JPMorgan wrote.
The US junk bond rally spanned across ratings. Robust economic data and easing rate concerns fueled November gains across all high-yield ratings.
Junk bonds are on track for weekly gains of 0.8%, driving the month-to-date returns to 2.96%, which would be the best since January.
BB yields tumbled 17 basis points week-to-date to 7.33%. Yields were down 66 basis points month-to-date from near 8% in October. BBs are set to post gains for the week, with week-to-date returns at 0.75%. November gains are at 3%, also the best since January.
CCC yields have plunged 40 basis points week-to-date, the most in the high yield, to close at 13.84%. Yields tumbled 91 basis points month-to-date from near 15% in October.
The probability of a soft landing has increased with the recent macro data driving a rally in risk assets in the past two weeks, Brad Rogoff of Barclays wrote in a Friday note.
Cash surge and a steady rally has drawn US borrowers into the market as $4.3 billion of new junk bonds has priced week-to-date, driving the month’s volume to more than $14 billion, up 53% already from the full month of October.
Supply is led by refinancing needs. Almost 90% of the supply is to refinance outstanding debt.
60% of new bonds were secured notes.
More borrowers are expected to take advantage of lower yields and chip away at a wave of 2025 maturities.

10 Nov 2023

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

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

The US junk bond primary market has been inundated with new supply after a slow October, with companies selling almost $8 billion so far this week, making it the busiest since mid-September. Monthly volume has topped $9 billion, which is already about 96% of the total for all of October.
Investors have poured new cash into the asset class since the Federal Reserve indicated last week that it was most likely finished with the most aggressive rate hike campaign in decades. US high yield funds reported a cash haul of $6.26 billion for the week ended Nov. 8, the third biggest on record. This was the first inflow into US junk bond funds in nine weeks, according to Refinitiv Lipper data.
A rush of borrowers came to take advantage of the current risk-on mood as yields fell 54 basis points in just seven sessions this month to 8.95%. Spreads were down 43 basis points.
More borrowers are expected to capitalize on the broad risk-on sentiment and refinance a chunk of 2025 notes as companies steadily chip away at the so-called maturity wall of near-term debt. Companies are also repaying some term loans.
This sudden rush of supply and a change of tone and messaging from Fed officials this week caused concerns about the possibility of another 25 basis-point increase in interest rates and a potential further delay of a possible rate cut.
Yields rose eight basis points on Thursday to 8.95%, fueled by a 13 basis-point jump in yields for CCCs, the riskiest of junk bonds.
US junk bonds are headed toward a modest weekly loss of 0.36% after a loss of 0.26% on Thursday, the biggest one-day loss in three weeks.
The losses came after Fed Chair Powell cautioned that the central bank won’t hesitate to tighten policy further if needed to contain inflation.
Federal Reserve Governor Michelle Bowman repeated that while she supported the central bank’s decision to keep rates unchanged at last week’s meeting, she still expects policymakers will need to raise interest rates more to contain inflation.
Federal Reserve Bank of Richmond President Thomas Barkin says “the job isn’t done” to get inflation back to the central bank’s 2% target, and slower demand will likely be required to achieve that goal.

10 Nov 2023

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

CAM Investment Grade Weekly Insights

Credit spreads are looking to finish the week tighter for the third time in a row. The Bloomberg US Corporate Bond Index closed at 124 on Thursday November 9 after having closed the week prior at 125. The 10yr is trading a 4.59% as we go to print Friday morning, just 2 basis points higher than its close the week prior. Through Thursday, the Corporate Index YTD total return was +0.28%.

Economics

It was a relatively light week for market moving data. Arguably the most meaningful print of the week was consumer sentiment data that was released on Friday morning. The data showed that sentiment slipped to a six-month low but that consumer long-term inflation expectations increased to the highest level since 2011. The Fed will likely be displeased with this development as consumer views on inflation can be a self-fulfilling prophecy. Next week will be much busier on the data front with several notable releases, including the consumer price index, producer price index and retail sales.

Issuance

It was a very solid week for new issuance as borrowers printed $43.925bln in new debt, besting the high end of expectations that were calling for $40bln. In total, 30 companies tapped the debt markets during the week. Next week should be relatively active as well and estimates are looking for $25-$30bln in debt but issuers will have to navigate a busy calendar of economic data. If that data results in Treasury and/or credit spread volatility then it could make issuance more or less attractive for borrowers.

Flows

According to Refinitiv Lipper, for the week ended November 8, investment-grade bond funds reported a net outflow of -$1.48bln. Flows for the full year are net positive +$12.187bln.

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