CAM High Yield Weekly Insights
Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at $2.2 billion. New issuance for the week was $6.0 billion and year to date issuance is at $10.8 billion.
(Bloomberg) High Yield Market Highlights
- US high-yield bonds snapped the five-day gaining streak to post the biggest one-day loss in three weeks as yields jumped from a four-month low of 8.03% to 8.16%. The losses were across the board, with CCCs, the riskiest segment of the junk bond market, ending the 12-day rally and posting negative returns for the first time in 2023. Junk bonds are heading toward modest losses for the week to end the two-week rally across all ratings. The recent gains in the US junk bond market were primarily fueled on expectations that moderating inflation will guide the Federal Reserve to slow down the pace of rate increases.
- Risk assets moved from easing inflation pressures back to concerns about an impending recession. A miss on retail sales drove the concerns this time, while Fed officials stuck to their guns and reiterated a “sufficiently restrictive policy” despite worsening data, Barclays’ Brad Rogoff wrote on Friday.
- Weakness in housing and manufacturing sectors continued to reinforce recession risks, Barclays added.
- The primary market was revived this week after the famine of 2022 by the recent two-week rally in junk bonds as yields and spreads dropped to a four- and a seven-month low, respectively, during the week.
- Nine borrowers sold $6b this week, the most in a week since January 2022.
- While junk bonds have had the strongest start to a year since 2009, with year-to-date returns of 3.66%, JPMorgan strategists warn that good news in terms of moderating inflation or the potential for a soft landing is already baked in the price. JPMorgan remain cautious on risk assets and are reluctant to chase the past two weeks’ rally as recession and over-tightening risks remain high.
- The rally may take pause to digest the recent economic data and the flood of new issues. Meanwhile, US equity futures struggle for direction as traders remained concerned over hawkish central banks, worsening economic data and earnings hiccups in the world’s largest economy.
(Bloomberg) Some Fed Speak from the Week
- Federal Reserve Vice Chair Lael Brainard said interest rates will need to stay elevated for a period to further cool inflation that’s showing signs of slowing but is still too high.
- “Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,” Brainard said in prepared remarks Thursday for a University of Chicago Booth School of Business event.
- She didn’t explicitly state a preference for whether the Fed should downshift to a quarter-point rate hike at its next decision due Feb. 1, as traders expect. Brainard also didn’t say what peak rate she envisioned this year, with Fed officials’ median forecast at about 5.1% and markets expecting about 4.9% followed by rate cuts in the second half.
- Still, her overall message was broadly consistent with other policymakers’ comments that borrowing costs must remain high for a while. At the same time, Brainard discussed signs of cooling inflation and economic activity and suggested that jobs and prices could ease without a big loss of employment.
- Federal Reserve Bank of Boston President Susan Collins said she favors a moderate pace of interest-rate increases, even as the central bank continues to tighten policy to reduce high inflation.
- “Now that rates are in restrictive territory and we may — based on current indicators — be nearing the peak, I believe it is appropriate to have shifted from the initial expeditious pace of tightening to a slower pace,” she said Thursday in remarks prepared for delivery to a housing conference hosted by her bank. “More measured rate adjustments in the current phase will better enable us to address the competing risks monetary policy now faces.”
- “As monetary policymakers, restoring price stability remains our imperative,” she said. “Thus, I anticipate the need for further rate increases, likely to just above 5 percent, and then holding rates at that level for some time.”
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.