CAM High Yield Weekly Insights

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.3 billion and year to date flows stand at -$45.8 billion.  New issuance for the week was nil and year to date issuance is at $71.2 billion.

(Bloomberg)  High Yield Market Highlights

  • The U.S. junk bond market is headed for the fifth week of gains after steadily edging higher for seven consecutive sessions, extending the July rally after a report eased concerns of an economic slowdown. This would be the longest gaining streak since December.  The week-long US junk-bond rally spurred telecom company Charter Communications to sell new bonds to bring some life back into the dormant primary market.
  • Charter Communications rushed in to take advantage of the risk- on mood to sell bonds to fund a stock buyback, among other things. Investors, hungry for new bonds in an issuance-starved market, flooded it with orders for more than $4b for a $1b offering.
  • The bonds priced at 6.375%, the lower end of talk. Bankers, led by Morgan Stanley, increased the size of the bond sale by $500m to $1.5b.
  • The broader U.S. junk bond rally was due to a combination of factors.
  • One, easing concerns about fears of an imminent recession following economic data earlier this week. S&P Global Ratings’ US chief economist Beth Ann Bovino echoed this sentiment and wrote that while macro economic conditions deteriorated or slowed down, there were no signs of an imminent recession yet.
  • Two, investors have given their vote of confidence to the asset class as they flood US junk bonds with new cash. US high-yield funds saw an influx of over $3b for week.
  • Three, the rally comes amid expectations that after perhaps another 75bps increase in the benchmark interest rate, the Federal Reserve will slow down the aggressive campaign of hiking rates while still curbing inflation and not causing a deep recession.
  • U.S. junk bonds posted gains of 0.36% on Thursday and are on track to rally for the fifth straight week, with gains of 0.87% week-to- date.
  • Yields dropped to a new eight-week low of 7.55% and spreads at +441.
  • The gains spanned across all high-yield ratings, with CCCs posting gains of 0.65% on Thursday and is poised to be the best asset class for the week, with week-to-date returns of 1.72%.


(Bloomberg)  What Recession?

  • The U.S. junk bond market is forecasting that the economy may weaken, but won’t tip into a recession.
  • It comes as Federal Reserve officials vow to continue to fight inflation aggressively, even if higher rates increase the risk of recession. And some strategists and money managers think credit markets aren’t paying enough attention to how bad the potential upcoming downturn could be.
  • But for now, investors are voting with their dollars. High-yield bonds gained 5.9% in July, their biggest one-month rally in a decade, and also rose in the first three days of August, according to Bloomberg index data.
  • Risk premiums for the bonds stand at levels not usually associated with recessions. Stocks, junk bonds, and other risk markets rallied in the second half of July as investors grew more hopeful that signs of slowing growth would translate to the Fed easing up on its plans to tighten the money supply. A JPMorgan Chase model said this week that equity, credit and rates markets are together assigning a 40% probability to recession, down from 50% in June.
  • Signs of slowing growth are coming from multiple areas. Walmart last week said shoppers are avoiding big-ticket items and focusing instead on buying groceries. AT&T said some customers are delaying paying bills. Pending home sales fell in June by the most since April 2020, according to a report last week.
  • In markets, the 10-year Treasury yield was 38 basis points below the 2-year on Aug. 3, the most inverted since August 2000. Persistent inversions can signal a recession is coming. Commodities prices have broadly been falling this month, too.
  • Riskier parts of the credit spectrum are also showing some concern. CCC rated bonds, among the lowest-rated corporates, gained 4.95% in July, while BB securities, the top tier of high yield, rose 6.1% on a total return basis.
  • But it’s not clear if these signs of trouble will translate to a serious downturn.
  • “The high-yield market is definitely pricing in some level of stress, but it’s pricing in nowhere near recession-type levels,” Citigroup strategist Michael Anderson said in a phone interview.
  • Between December 1996 and December 2021, there were 28 months when the economy was in recession, according to an analysis by Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. The median junk-bond spread during those months was about 835 basis points, or 8.35 percentage points, based on ICE BofA indexes. That spread is currently closer to 454 basis points on August 3, around the median level for non-recession months, according to his analysis.