CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

• US junk bonds suffered their worst one-day selloff since March, with yields surging to a five-month high, as spiking oil prices hit Treasuries. The yields on 5-year and 10-year US debt climbed to a near three-year high.
• The rally in oil prices for a third straight session fueled losses in equities and bonds on renewed bets that the Federal Reserve will raise interest rates soon.
• The broad risk aversion pushed CCC yields to new three-year high of 13.57% and spreads to a fresh two-year high of 885 basis points.
• Average yields jumped 15 basis points to 7.63%, the biggest one-day increase since March. CCC yields rose 20 basis points, the biggest one-day jump since June. CCCs also racked up their biggest one-day loss since March
• Meanwhile, US borrowers are rushing to sell debt ahead of the Fed meeting next week
• Lots of new deals priced, taking the week’s tally to $12b, the busiest week since early June
• The calendar is expected to continue to build in the coming weeks.

(Bloomberg)  US Core CPI Tops Forecasts, Bolstering Case for Rate Hike

• A key gauge of US consumer prices reported August numbers Friday morning, bolstering the case for Federal Reserve officials to raise interest rates next week.
• The consumer price index, excluding food and energy, climbed 0.3% in August from a month earlier, according to Bureau of Labor Statistics data out Friday. The median estimate in a Bloomberg survey called for a 0.2% increase. On an annual basis, it advanced 2.4%.
• Futures showed investors priced in a rate hike next week as a near certainty following the release, and put a high likelihood on a second increase before the end of the year.
• The report suggests inflation made little progress toward the Fed’s goal last month amid ongoing pressures from the Iran war, tariffs and the data center buildout. The US central bank will likely see the numbers as tipping the scale in favor of the first rate increase in three years after some officials suggested the Sept. 15-16 decision could come down to what the figures showed.
• “The renewed march higher in oil, gasoline and diesel prices add to concerns that higher energy prices could spill over to other goods and services and inflation expectations,” Nationwide Chief Economist Kathy Bostjancic said in a note. “As such we are now looking for the Fed to raise rates” next week, she said.
• Fed Chairman Kevin Warsh has been reluctant to tip his hand on the central bank’s next move, but in a speech last month he said the Fed would “have work to do” if it could not “be confident that underlying inflation is moving to our objective, clearly and at sufficient speed.”
• The US economy, meanwhile, is contending with resurgent energy prices as the Middle East and Russia-Ukraine wars hit supplies. This week, oil prices pushed above $100 a barrel and US retail diesel prices rose to a record.
• Friday’s report showed the overall CPI was up 0.4% from the prior month and 3.4% from a year earlier. Energy prices rose 2.1% in August.
• “It’s not really a report that makes us get more concerned about the inflation outlook,” even if it will lead the Fed to raise rates next week, said Stephen Juneau, a senior economist at Bank of America Corp.
• Many Americans have been squeezed between rising prices and tepid pay gains. A separate report Friday that combines the inflation figures with recent wage data showed real average hourly earnings fell 0.3% in August from a year earlier, adding to a string of weak readings since the Iran war began.
• Central banks typically raise interest rates to increase borrowing costs, dampen demand and cool inflation. Fed officials have left rates steady at each of their last five meetings, though at the July gathering, three of them dissented in favor of a quarter-point rate hike.
• The August CPI report is the last major gauge of inflation before the September gathering. A separate report Thursday showed producer prices rose last month by the most since May, lifted by a surge in energy prices.
• The Fed’s preferred measure of inflation, the personal consumption expenditures price index, is due at the end of the month. Following Friday’s release, economists at several firms said they expect the core gauge in the PCE report to show a 0.3% increase.

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.