Author: CAM Team

14 Jul 2023

2023 Q2 High Yield Quarterly

In the second quarter of 2023, the Bloomberg US Corporate High Yield Index (“Index”) return was 1.75% bringing the year to date (“YTD”) return to 5.38%.  The S&P 500 index return was 8.74% (including dividends reinvested) bringing the YTD return to 16.88%.  Over the period, while the 10 year Treasury yield increased 37 basis points, the Index option adjusted spread (“OAS”) tightened 65 basis points moving from 455 basis points to 390 basis points.

All ratings segments of the High Yield Market participated in the spread tightening as BB rated securities tightened 31 basis points, B rated securities tightened 67 basis points, and CCC rated securities tightened 136 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 the five years is 411 basis points.

The sector and industry returns in this paragraph are all index return numbers.  The Other Industrial, Finance Companies, and REITs sectors were the best performers during the quarter, posting returns of 3.90%, 3.66%, and 3.44%, respectively.  On the other hand, Banking, Electric Utilities, and Other Financial were the worst performing sectors, posting returns of -1.68%, -0.26%, and -0.09%, respectively.  At the industry level, retailers, leisure, and retail REITs all posted the best returns.  The retailers industry posted the highest return of 6.39%.  The lowest performing industries during the quarter were wireless, life insurance, and paper.  The wireless industry posted the lowest return of -2.67%.

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 the second quarter this year.  Of the issuance that did take place, Energy took 23% of the market share followed by Discretionary at an 18% share and Financials at a 15% share.

The Federal Reserve did lift the Target Rate by 0.25% at the May meeting but took a pause at the June meeting.  This was the first rate pause during the current 15 month long hiking cycle where the Fed has hiked by 500 basis points.  With inflation still too high and the labor market still too tight, Chair Jerome Powell has provided a clear message that additional hikes this year are to be expected.  “A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year,” Powell said, referencing the policy-setting Federal Open Market Committee during a conference at the end of June.  “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”i  Powell did acknowledge that the outlook is “particularly uncertain” and noted that the Fed will pay close attention to ongoing economic data releases.  With regard to the banking turmoil that started back in March, Powell suggested that more supervision and regulation is likely needed but did note that the US banking system is “strong and resilient.”  At this point, treasury rates and high yield spreads are about where they were prior to the banking scare.


Intermediate Treasuries increased 37 basis points over the quarter, as the 10-year Treasury yield was at 3.47% on March 31st, and 3.84% at the end of the second quarter.  The 5-year Treasury increased 59 basis points over the quarter, moving from 3.57% on March 31st, to 4.16% at the end of the second 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 first quarter GDP print was 2.0% (quarter over quarter annualized rate).  Looking forward, the current consensus view of economists suggests a GDP for 2023 around 1.3% with inflation expectations around 4.3%.[ii]

Being a more conservative asset manager, Cincinnati Asset Management Inc. 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 Q2, Index performance was once again tilted toward the lowest rated end of the market as there was a mostly risk-on tone in the quarter.  Additionally, given the positive quarterly return of the Index, our natural cash position was a drag on performance for Q1.  Our credit selections within communications and energy were also a drag to performance.  Benefiting our performance this quarter was our overweight in consumer cyclicals, particularly home construction, and our credit selections in transportation, leisure, and aerospace and defense.

The Bloomberg US Corporate High Yield Index ended the second quarter with a yield of 8.50%.  Treasury volatility, as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index), has picked up quite a bit the past 18 months.  Over that timeframe, the MOVE has averaged 122 relative to a 62 average over 2021.  However, the current rate of 110 is well below the spike near 200 back in March during the banking scare.  The second quarter had eight bond issuers default on their debt, taking the trailing twelve month default rate to 1.64%.iii  The current default rate is relative to the 0.86%, 0.83%, 0.84%, 1.27% default rates from the previous four quarter end data points listed oldest to most recent.  The fundamentals of high yield companies still look good considering the uncertain economic backdrop.  From a technical view, fund flows were only slightly negative in the quarter at -$0.6 billion after totaling -$24.3 billion during Q1.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 Fed will continue to remain a large part of the story in the second half of this year.  While their message to expect more hikes remains clear, market participants have listened as they exited previous positioning for rate cuts later in 2023.  As an aggregate of over 50 institutional contributors, the Bloomberg recession probability forecast currently stands at 65%.  Naturally, there are plenty of reasons to be cautious as lending standards have tightened and defaults are on the rise.  That said, the unemployment rate is sub 4%, demand is resilient, and good fundamentals are still providing cushion.  Our exercise of discipline and selectivity in credit selections 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:

i Bloomberg June 29, 2023:  Powell Says Likely Need Two or More Hikes to Cool Inflation

ii Bloomberg July 3, 2023: Economic Forecasts (ECFC)

iii JP Morgan July 5, 2023:  “Default Monitor”

iv CreditSights June 29, 2023:  “Credit Flows”

10 Apr 2023


El crédito con grado de inversión (en inglés IG) registró rendimiento total positivo estable a partir de 2023. Durante el primer trimestre, el diferencial ajustado por opciones (OAS) en el Índice de Bonos Corporativos de EE. UU. de Bloomberg se amplió en 8 puntos básicos y llegó a 138 después de haber comenzado el año en 130. Con diferenciales más amplios, el rendimiento positivo durante el trimestre se vio impulsado por los ingresos por cupones y un repunte en los bonos del Tesoro, con el título a 10 años cerrando el trimestre en 3.47 %, 41 puntos básicos menos en lo que va del año.

Durante el primer trimestre, este Índice registró una rentabilidad total del +3.50 %. La rentabilidad total sin comisiones del programa de grado de inversión de CAM durante el trimestre fue del +3.41 %.

El grado de inversión vuelve a estar de moda

En nuestro último comentario, escribimos que el rendimiento total del crédito con grado de inversión podría estar a punto de rebotar. El Índice Corporativo ahora ha publicado dos trimestres consecutivos con rendimiento total positivo: el cuarto trimestre de 2022 y el primer trimestre de 2023 con +3.63 % y +3.50 %, respectivamente. 2022 fue el peor año en cuanto a rentabilidad total para el credito con grado de inversión registrado (-15.76 %), y el 7 de noviembre llegó al valor más bajo desde el pun o de vista de la rentabilidad. Desde el 7 de noviembre, el Índice Corporativo ha registrado una rentabilidad total positiva del +8.89 %, lo que ilustra la rapidez con la que puede cambiar el temperamento del mercado.

Los bonos del Tesoro a corto plazo ofrecen actualmente algunos de los rendimientos más elevados de los últimos años. El bono a 2 años cerró el primer trimestre de 2023 en 4.03 % y creemos que los de corta duración son una alternativa atractiva frente al efectivo. Aunque las tasas de corto plazo pueden resultar atractivas para colocar algo de efectivo, no creemos que sean un sustituto adecuado para una cartera de bonos corporativos de mediano plazo para la mayoría de los inversores, debido al alto grado de riesgo de reinversión que presentan. Cuando la Reserva Federal gire y comience a recortar la tasa de referencia, es probable que el rendimiento de los bonos del Tesoro de corto plazo tomen la misma dirección. En ese momento, un inversor que busque reemplazar sus bonos del Tesoro de corto plazo puede encontrarse con que el crédito de mediano plazo ha repuntado de forma significativa desde entonces en términos relativos; lo que podría hacer que el punto de entrada para el crédito con grado de inversión resultase menos atractivo de lo que es hoy. Al evitar los bonos corporativos de mediano plazo y limitar las asignaciones de renta fija a activos de corta duración, el inversor posiblemente corre el riesgo de renunciar a una buena cantidad de rentabilidad total. Para ciertas clases de activos, el posicionamiento táctico y la búsqueda del momento justo en el mercado pueden ser un esfuerzo beneficioso. Sin embargo, no creemos que el crédito con grado de inversión sea de ese tipo. En cambio, sostenemos que es más eficaz para los inversores con horizontes de medio o largo plazo considerar el crédito con grado de inversión de manera estratégica y asignarle una posición de capital permanente en una cartera de inversión bien diversificada.

Dinero y banca

Dada la agitación bancaria, pensamos que sería ilustrativo comentar la exposición y la filosofía de inversión de CAM en lo que respecta al sector de las instituciones financieras.

El sector financiero comprende una gran parte del Índice Corporativo, con una ponderación del 33.07 % al cierre del primer trimestre de 2023. La banca fue la industria más grande dentro del sector financiero, con una ponderación del 23.22 %. El resto de las industrias que componen la balanza del sector financiero son agentes de bolsa y administradores de activos, empresas financieras, aseguradoras, fideicomisos de inversión inmobiliaria (o REIT) y otras finanzas. CAM siempre ha tratado de limitar la cartera de cada cliente a una ponderación del 30 % (o menos) dentro del sector financiero para garantizar una diversificación adecuada desde el punto de vista del riesgo. A finales del primer trimestre, la cartera de CAM tenía una exposición ligeramente inferior al 20 % en la banca, mientras que el resto de la exposición en el sector financiero se componía de tres empresas de seguros de propiedad y siniestros (P&C) y dos empresas de REIT.

En cuanto a la exposición en el sector bancario, CAM es muy selectiva, con inversiones en apenas 11 bancos a fines del primer trimestre de 2023. Con un enfoque disciplinado en esta industria, siempre nos hemos centrarnos en instituciones bien administradas y de alta capitalización con flujos de ingresos muy diversificados y huella crediticia en diferentes regiones. El carácter fundamental de la filosofía de inversión de CAM y su proceso de análisis particular excluyen a bancos especializados y a bancos regionales porque tienen carteras de préstamos demasiado expuestas a determinados sectores o porque sus huellas están demasiado concentradas. Aplicamos el mismo tipo de análisis riguroso a nuestras exposiciones financieras en seguros y REIT. Como resultado, tenemos un alto grado de confianza en nuestras inversiones en el sector de instituciones financieras.

Aversión a la inversión

Seguimos recibiendo preguntas de los inversores sobre la curva de rendimiento invertida y su impacto en la cartera. Hay dos grandes temas para analizar.

  1. Para las cuentas nuevas, la inversión es auspiciosa, y genera un atractivo punto de entrada; mientras que las cuentas más antiguas pueden disfrutar de este mismo beneficio cuando realizan nuevas compras. La curva invertida ha creado de manera sistemática situaciones en las que resulta oportuno comprar bonos de mediano a corto plazo que, en nuestra opinión, probablemente tengan buen desempeño a medida que la curva se normalice con el tiempo. Pudimos comprar bonos que vencen en 7-8 años a precios que son atractivos en relación con los bonos de 9-10 años. Esto se traduce en una menor duración global para la cartera de clientes y un menor riesgo de la tasa de interés. Este tipo de oportunidades son mucho más pasajeras en entornos con curvas de bonos del Tesoro normalizadas al alza.
  2. Para las cuentas más antiguas o con inversión completa, el período de tenencia será más largo de lo habitual. Esto se debe a que la curva de rendimiento invertida ha dado lugar a una economía menos atractiva para las operaciones de extensión. En lugar de vender bonos a los 5 años, como haríamos normalmente, seguiremos conservándolos y cobrando los cupones mientras esperamos la normalización de la curva. Tendremos paciencia y estaremos atentos al panorama para ver si se presentan oportunidades de extensión; lo que significa que es probable que mantengamos los bonos existentes hasta que queden 3 o 4 años para su vencimiento, siempre que la curva permanezca invertida.

Las curvas del bono del Tesoro se normalizarán, siempre lo han hecho. Históricamente, las curvas invertidas han sido breves; la mayor duración registrada para 2/10s fue de 21 meses, de agosto de 1978 a abril de 1980.i La curva invertida actual 2/10 comenzó el 5 de julio de 2022 y alcanzó su punto más marcado de -107 pb el 8 de marzo de 2023 antes de revertir bruscamente su curso para terminar el trimestre en -55 pb. El catalizador más probable de un ascenso en la curva de rendimiento es un ciclo de relajación de la Reserva Federal y una disminución en la tasa de fondos federales. La mera anticipación de una pausa en el ciclo de alzas podría bastar para que el mercado iniciara el proceso de vuelta a una curva más normalizada para los bonos del Tesoro.

La demanda de crédito con grado de inversión se ha mantenido fuerte a principios de año. Según fuentes compiladas por Wells Fargo, los fondos con grado de inversión registraron $62,100 millones de entradas en lo que va del año hasta el 15 de marzo. Hemos observado esta demanda y el impacto asociado en los precios en el mercado primario, en particular, de los grandes compradores institucionales. En nuestro caso, el período de inversión para una cuenta nueva es de 8 a 10 semanas en promedio. En el caso de las cuentas nuevas, históricamente hemos sido muy consistentes en buscar oportunidades atractivas en el mercado primario, de modo que se podría esperar que entre el 30 % y el 35 % de la cartera estuviera compuesta por nuevas emisiones. Las cuentas más antiguas también podrían comprar nuevas emisiones ocasionalmente, a medida que reciben ingresos por cupones y se acumula efectivo al punto de que la cuenta está lista para realizar una compra.
Repasemos la mecánica de lo que observamos en la actualidad en el mercado primario:
Una empresa y la banca de inversión, en un mercado normalizado con una demanda equilibrada, podrían estar dispuestos a pagar lo que llamamos una “concesión por nueva emisión” a los inversores para incentivarlos a comprar un bono recién emitido. Por ejemplo, si una empresa tiene un bono en circulación a 9 años que se negocia con un diferencial de 100/10 años, sería totalmente razonable que un inversor esperara que le pagaran 115/10 años para compensar la duración adicional, así como alguna otra compensación en forma de diferencial para incentivarlo a comprar el nuevo bono. Las concesiones por nuevas emisiones cambian con frecuencia y se basan en la dinámica del mercado, como la situación de la economía, las cuestiones geopolíticas, la demanda global de crédito, así como las características de la empresa emisora y la opinión generalizada sobre su solvencia crediticia. A veces, las concesiones por nuevas emisiones pueden ser muy atractivas y otras veces pueden ser fijas o incluso negativas.
A lo largo del primer trimestre, observamos con mucha frecuencia concesiones por nuevas emisiones fijas o negativas, por lo que los bonos secundarios de un emisor determinado resultaron más atractivos que los nuevos. En ocasiones, se debió a que los bonos secundarios eran una inversión oportunista en relación con los bonos nuevos, pero en otras se debió a que tanto los bonos secundarios como los nuevos estaban valorados de manera razonable o sobrevalorados según nuestro análisis. El razonamiento para comprar un bono a 10 años que ofrece menos rendimiento que un bono a 8 años puede parecer poco sensato, pero la lógica reside en cómo consideramos las limitaciones impuestas a los inversores en el mercado de bonos corporativos. Los bonos son finitos, se negocian en el mercado extrabursátil (no en bolsa) y son menos líquidos que las acciones. Hay un problema importante al que puede enfrentarse de vez en cuando un interesado en comprar un bono: ¿qué pasa si no hay quien esté dispuesto a vender? Para complicar más aún al comprador de nuestro ejemplo, ¿qué sucede si dispone de mucho dinero en efectivo que necesita invertir? Este es el fenómeno que estamos observando actualmente; compradores muy grandes que están dispuestos a “pagar bien” para que el dinero rinda. El comprador grande no puede salir y comprar $10-$50 millones del bono secundario porque, sencillamente, no hay suficientes vendedores. En cambio, el comprador grande debe pagar una prima para que su dinero rinda y pagar demasiado (en nuestra opinión) por un bono en el mercado primario. Esto no es un problema para CAM y destaca una de nuestras ventajas comparativas. Como administrador boutique, aún somos lo bastante pequeños como para poder operar con libertad y comprar lo que necesitamos de forma oportunista para cubrir las cuentas de los clientes. Si nos dan la opción de comprar un bono más corto con un rendimiento más alto que un bono más largo del mismo emisor, compraremos el corto siempre y cuando den los números desde el punto de vista económico. Aunque es probable que el bono más reciente tenga un cupón más alto porque su precio se basa en una tasa del Tesoro más alta que el bono a 8 años, cuyo precio se fijó hace dos, el cupón por sí solo no lo es todo. El diferencial y el rendimiento por duración es la verdadera clave para generar rentabilidad total, no el cupón. El siguiente es un ejemplo real que observamos a principios de febrero de este año:

El nuevo bono procedía de un emisor que tenemos en alta estima y una empresa en la que actualmente invertimos para cuentas de clientes (nota: no mencionamos el nombre de la empresa porque no se trata de una recomendación para comprar o vender un título-valor específico). El precio inicial de la nueva emisión era de +170 pb/10 años, un nivel que consideramos atractivo dada la solvencia del emisor y su valor relativo en el mercado en aquel momento, pero ese precio era solo un punto de partida. En el caso de las emisiones nuevas, el precio inicial cambia en respuesta a la solidez de la demanda y es un proceso muy fluido que se produce en unas pocas horas. En este caso particular, hubiéramos estado dispuestos a comprar el nuevo bono a un diferencial de +160 pb o superior, pero dada la fuerte demanda de compradores, el sindicato logró mover el precio a +143 pb, momento en el que dejamos de participar. Por lo tanto, en este escenario, dada la posibilidad de comprar el nuevo bono y el bono secundario, sin duda elegiríamos el bono secundario por varias razones. El bono secundario ofrecía 2 pb más de rendimiento, requería una inversión inicial de $14 menos por su precio con descuento, y su vencimiento era 29 meses menor que el del nuevo bono, con un rendimiento significativamente mayor por duración. Resulta que, en este ejemplo, decidimos no comprar el bono secundario porque consideramos que estaba muy valorado en ese momento y no era una oportunidad para invertir el capital de nuestros clientes. Si el bono se hubiera negociado con un diferencial de +150, lo hubiéramos comprado. Este es solo un ejemplo de nuestra disciplina de inversión, en cómo abordamos las decisiones que tomamos para los clientes a diario. Esperamos que esto sea útil para explicar algunas de las dinámicas que hemos estado viendo en el mercado para comenzar el año y cómo encaramos la administración de riesgos y las oportunidades para las cuentas de clientes.

¿Qué hará la Reserva Federal?

Sabemos que la Reserva Federal no puede aumentar su tasa de referencia monetaria para siempre. Ya hemos visto las consecuencias de este ciclo de alzas sin precedentes, como las grietas que han aparecido en algunos rincones de la banca, y creemos que cada vez es más evidente que la política monetaria está empezando a frenar la economía. A finales del primer trimestre de 2023, los futuros de fondos federales preveían un alza en las tasas de +25 bp en la reunión de mayo y un 43 % de probabilidades de un alza de +25 bp en la reunión de junio. Quizá lo más sorprendente sea que los futuros también preveían tres recortes en la tasa de interés de referencia en los tres últimos meses del año. Desde entonces hemos recibido un magro informe de ofertas de empleo en la mañana del 4 de abril que mostró que la demanda laboral y las ofertas de empleo se han enfriado en EE. UU. con una caída de 10 millones por primera vez desde mayo de 2021.ii El próximo gran dato será el informe de empleo de marzo, que se publicará el 7 de abril. Creemos que la Reserva Federal seguirá guiándose por los datos, sobre todo en lo que respecta al empleo. Si el mercado laboral se enfría de forma significativa, el actual ciclo de alzas podría haber alcanzado ya su punto álgido. Si el mercado laboral lo resiste, prevemos una o dos alzas más y posiblemente más si es necesario. En la actualidad, nos resulta difícil prever recortes en 2023 y creemos que lo más probable es una pausa de varios meses.

Seguimos creyendo que la Reserva Federal no tiene muchas opciones: tiene que endurecer demasiado las condiciones o durante demasiado tiempo, lo que seguramente conducirá a una recesión. Predecir el momento o la profundidad de cualquier recesión es difícil, por lo que consideramos más productivo centrarnos en los riesgos que podemos medir y controlar mejor dentro de nuestra cartera, y el riesgo de crédito es la variable en la que podemos ejercer mayor influencia. Creemos que estamos bien equipados para administrar y evaluar el riesgo crediticio de las carteras de clientes gracias a nuestro equipo de gran experiencia. En general, una recesión no es buena para los activos de riesgo, pero no es una sentencia de muerte para el crédito con grado de inversión. Estas empresas tienen grado de inversión por una razón, y si hemos hecho nuestro trabajo y hemos surtido la cartera de forma adecuada, creemos que se desempeñará bien con independencia del entorno económico. Buscamos empresas que presenten modelos de negocio resilientes y equipos de dirección muy competentes, así como con gran capacidad financiera y margen de maniobra. Creemos que el crédito con grado de inversión podrá superar a la mayoría de los activos de riesgo si acabamos en un escenario de recesión impulsado por la Reserva Federal.

El tiempo sigue avanzando

El crédito se inicia con viento a favor en 2023, pero aún queda mucho por hacer para saldar los rendimientos negativos de 2022. Afortunadamente, el tiempo es el mejor aliado de los inversores en bonos. Los bonos tienen un vencimiento establecido y los que cotizan con descuento se acercarán a la par con el paso del tiempo. El tiempo también les da a los inversores la oportunidad de obtener ingresos por cupones. Creemos que el futuro es prometedor para los inversores en bonos a largo plazo. Los riesgos persisten, sin duda, y estamos particularmente preocupados por la situación geopolítica. Tampoco podemos dejar de preguntarnos qué nos resta aún conocer en cuanto a la velocidad con la que la Reserva Federal ha aumentado la tasa de referencia. Seguiremos trabajando sin descanso para usted y para el resto de nuestros clientes, haciendo todo lo posible para obtener una rentabilidad superior ajustada al riesgo. Gracias por su continuo interés y por su confianza en nosotros como administradores.

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. En nuestro sitio web se encuentran disponibles las divulgaciones adicionales sobre los riesgos materiales y los beneficios potenciales de invertir en bonos corporativos:


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.

i Reserva Federal de St. Louis, 2022, “10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity”
ii Wells Fargo Securities, 16 de marzo de 2023, “Credit Flows | Supply & Demand: 3/9-3/15”
iii Bloomberg, 4 de abril de 2023, “US Job Openings Fall Below 10 Million for First Time Since 2021”

09 Apr 2021

2021 Q1 Investment Grade Quarterly

It was a challenging first quarter for corporate bonds as rising interest rates were a headwind for performance across the fixed income universe. Investment grade credit spreads were a bright spot, having shown resiliency during the quarter, but tighter spreads could not overcome volatile interest rates. The option adjusted spread (OAS) on the Bloomberg Barclays US Corporate Bond Index compressed 5 basis points during the quarter, opening at 96 and closing at 91. It was only a little more than a year ago when the global pandemic had roiled markets, sending the spread on the index all the way out to 373. The tone has improved substantially since last March and spreads are now tighter than their narrowest levels of last year when the index opened 2020 at an OAS of 93.

Higher Treasuries were the negative driver of performance for credit during the quarter. The 10yr Treasury opened 2021 at 0.91% and was volatile along the way before closing the quarter at 1.74%. This 83 basis point move in the 10yr over such a short time period was too much to overcome for coupon income and spread compression. The Corporate Index posted a total return of -4.65% during the first quarter. This compares to CAM’s gross quarterly total return of -3.50%.

First Quarter Recap

Excess return presents a picture of the performance of credit spread and coupon income, excluding the impact of Treasuries. The sector that posted the best excess returns to start the year was Energy. This should come as no surprise as oil prices were up over 20% during the quarter and Energy was the worst performing sector for the full year 2020. It was ripe for a rally. Packaging was the lone major industry to post a negative excess return during the quarter of just -0.05%. This is in line with the larger theme in the market currently that has made more cyclical sectors in vogue as the pandemic recovery trade was in full force. This has left some more stable and defensive industries as out of favor at the moment. The recovery trade theme has also led to outperformance for riskier BBB-rated credit versus higher quality A-rated credit. BBB-rated credit outperformed A-rated during the quarter to the tune of 85 basis points on a gross total return basis – a significant number to be sure. We will see, as the year plays out, if this reach for yield can sustain its outperformance over a longer time horizon. We believe that some of the move in cyclicals has been overdone and as a result the portfolio is positioned with a more defensive posture than the index.

Investing in a High Rate World

After the corporate index posted a cumulative gain of almost 25% over the previous two years through the end of 2020, most of it on the back of tighter spreads and lower rates, it is fair to expect a pull-back at some point. The current quarter’s performance can almost entirely be defined by Treasuries reclaiming some of the ground that they gave up during the pandemic. Recall that the 10yr Treasury closed as high as 1.88% in the early months of 2020 before falling as low as 0.51% in August of last year and now closing the first quarter of 2021 at 1.74%. But there is more to the story than a higher 10yr Treasury and a closer look at the Treasury curve reveals some more interesting details, particularly the spread between the 5yr and 10yr Treasury. As you can see from the below chart, the 5/10 Treasury curve has steepened substantially over the course of the past year.

CAM consistently positions the portfolio in maturities generally ranging from 5-10 years and there are several reasons that we have structured our investment grade program around this intermediate positioning. First, our customers will know precisely what they are going to get from us in that they can see the exact quantity of each individual company bond that they own and they can count on us to be positioned within a certain maturity band. This allows the client to more effectively manage other portions of their asset allocation accordingly without worrying that we might engage in interest rate speculation or a wholesale change in strategy. The second reason we have settled on this maturity positioning is that it exposes clients to less interest rate risk than the benchmark and far less interest rate risk than if we went further out the curve by purchasing 30yr bonds. We are good at credit work; building customized portfolios, populating them with individual credits based on our analysis of their credit worthiness and reaping those rewards over a 3-5 year time horizon. Our intermediate positioning allows our returns to be driven by credit spread compression and not by our ability to accurately time interest rates. The third and perhaps most important reason that we settled on this intermediate positioning as part of our core strategy has to do with the steepness of both the Treasury curve and the corporate credit curve from 5 to 10 years. Over long time periods this tends to be the steepest portion of both of those curves relative to the curve as a whole.i To provide some context, at quarter end, the 10/30 Treasury curve was 67 basis points; that is, the compensation afforded for selling a 10yr Treasury and buying a 30 year Treasury was an additional 67 basis points in yield, or 3.35bps of yield per year for each year of the 20 year maturity extension. If we compare this to the 5/10 curve at quarter end when that particular curve was 80 basis points, or 16 basis points of extra yield for each of the 5 years between 5 and 10yrs, you can see that the 5/10 curve is significantly more steep than the 10/30 curve. You are extracting much more compensation from selling a 5yr bond and extending to 10yrs than you would get from selling a 10yr bond and moving all the way out to 30 years. Not only is an investor being much better compensated for each additional year from 5/10 but they are taking substantially less interest rate risk by limiting their extension to just 10 years in lieu of 30 years. As you can see from the above chart, the 5/10 curve flattened all the way down to 7 basis points during the worst of the pandemic-related market dislocation but it has since steadily risen, and is now at its highest level since the 3rd quarter of 2014.

To say we are excited about this newfound steepness in the Treasury curve would be an understatement –we are ecstatic, as it allows us to do two things. First, it allows seasoned accounts (those who have been with us at least 3-5 years) to extract attractive compensation by selling their 5yr corporate bonds and using those proceeds to purchase bonds that mature in 8 to 10 years. For those accounts that have been with us for less time or for new accounts it provides an attractive entry point for new money that can take advantage of the roll-down afforded by the steep yield curve. The roll-down to which we refer is the aforementioned 16 basis points per year that a bond was receiving at quarter end for each year that it declined in maturity.
But the bond math doesn’t stop there. On top of the Treasury curve is another curve, the corporate credit curve. Since corporate bonds trade with spread on top of Treasuries they also have their own curve that varies with steepness over time. The shape of the corporate credit curve is more consistently upward sloping than the Treasury curve. Treasury curves, at times, can flatten or even invert. The corporate credit curve on the other hand is almost always upward sloping.ii It only rarely flattens or inverts on a temporary basis during times of extreme market stress or dislocation, and we are happy to take advantage of those fleeting opportunities when they do appear.

As you can see from the chart above, the yield curve for investment grade corporates shares some of the current qualities of the Treasury curve with a pronounced steepness in the belly of the curve and a much flatter slope beyond 10 years. The beauty of these curves is that, even in the unlikely event that Treasuries and credit spreads stay static over the next 5 years we can still generate a positive total return from coupon income and capital appreciation through the roll-down of bonds currently held. Additionally, the steepness afforded by curves currently offers us some protection from rising rates and/or wider credit spreads.

Our proven strategy seeks to provide clients with a transparent separately managed account that provides a return that is good as or better than the Bloomberg Barclays U.S. Corporate Index. We also want to get them there with less volatility through diminished interest rate risk and credit risk along the way. One of the reasons we outperformed the index by 115 basis points during the first quarter was by virtue of our intermediate positioning. Our portfolio ended the quarter with duration of 6.30 while the index had duration of 8.48.

Looking Ahead

Preservation of capital is at the forefront of our strategy so we hate to post a quarter with a negative total return and we know that our investors feel the same way. Thankfully, given the way that bond math works, and especially for investment grade rated credit, such impairments are typically temporary in nature. Take for example a bond that is trading at a discount to par –as time passes and it gets closer to its maturity date, its price gets closer to par, all else being equal. Discount bonds eventually recapture their value as time goes by – it is just a function of the way that the math works. As regular readers know, even in good times after we post a great quarter, we are loath to focus on such short term performance. Investment grade rated corporate credit is at its best when it is treated as a strategic long term allocation that is part of a well-diversified portfolio. In fact, one of the reasons to own this asset class is to aid in that goal of achieving diversification due to its low correlation with other asset classes and its often negative correlation with equities. Bottom line, if an investor is looking for income, diversification and capital preservation as well as a chance to keep up with and/or beat inflation, then investment grade credit is among the ideal asset classes for helping to achieve those goals. After a volatile first quarter we have a guarded optimism and believe there is an attractive opportunity set for our investment philosophy going forward. We thank you for your continued interest and for placing your trust and confidence in us to manage your money.

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.

i Federal Reserve Board, June 2006 “The U.S. Treasury Yield Curve: 1961 to the Present”
ii Robert C. Merton, May 1974 “On The Pricing of Corporate Debt: The Risk Structure of Interest Rates

09 Apr 2021

2021 Q1 High Yield Quarterly

In the first quarter of 2021, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 0.85% while the CAM High Yield Composite gross total return was -0.01%. The S&P 500 stock index return was 6.17% (including dividends reinvested) over the same period. The 10 year US Treasury rate (“10 year”) had a steady upward move as the rate finished at 1.74%, up 0.83% from the beginning of the quarter. During the quarter, the Index option adjusted spread (“OAS”) tightened 50 basis points moving from 360 basis points to 310 basis points. Each quality segment of the High Yield Market participated in the spread tightening as BB rated securities tightened 38 basis points, B rated securities tightened 46 basis points, and CCC rated securities tightened 110 basis points. Take a look at the chart below from Bloomberg to see a visual of the spread moves in the Index over the past five years. The graph illustrates the speed of the spread move in both directions during 2020 and the continuation of lower spreads in 2021.

The Transportation, Energy, and Other Industrial sectors were the best performers during the quarter, posting returns of 4.44%, 3.60%, and 2.08%, respectively. On the other hand, Utilities, Banking, and Insurance were the worst performing sectors, posting returns of -1.75%, -0.43%, and -0.39%, respectively. At the industry level, oil field services, retail REITs, refining, and airlines all posted the best returns. The oil field services industry posted the highest return (13.00%). The lowest performing industries during the quarter were health insurance, railroads, supermarkets, and wirelines. The health insurance industry posted the lowest return (-1.34%).

The energy sector performance has picked up where last year left off and has continued to be quite positive to start 2021. As can be seen in the chart to the left, the price of crude has continued its upward trajectory during the quarter. Recently, OPEC+ members agreed to start increasing oil production. They are making a bet on a continued economic rebound by deciding to add more than 2 million barrels a day as summer approaches. “Even in those sectors that were badly hit such as airline travel, there are signs of meaningful improvement,” said Saudi Energy Minister Prince Abdulaziz bin Salman.i

During the first quarter, the high yield primary market posted $162.0 billion in issuance. Many companies continued to take advantage of the open new issue market, and the quarter now holds the top spot for the busiest quarter on record. Issuance within Consumer Discretionary was the strongest with approximately 26% of the total during the quarter. Consumer Discretionary has now had the most issuance for the last four consecutive quarters. Over that time frame, Consumer Discretionary has accounted for approximately 25% of the issuance. Communications has accounted for approximately 13% and good enough for second place.

The Federal Reserve maintained the Target Rate to an upper bound of 0.25% at both the January and March meetings. The chart to the left gives a snapshot of how the Fed’s projections have changed for three economic data points. While broad market consensus is also quite upbeat on the economic outlook, market participants have pushed up the 10-year Treasury yield more than triple off the 0.51% low seen in August 2020. In the face of this, the Fed is content to keep a very accommodative posture. Federal Reserve Chair Jerome Powell said in a recent interview, “So, we will — very, very gradually, over time, and with great transparency, when the economy has all but fully recovered — we will be pulling back the support that we provided during emergency times.”ii

Intermediate Treasuries increased 83 basis points over the quarter, as the 10-year Treasury yield was at 0.91% on December 31st, and 1.74% at the end of the first quarter. The 5-year Treasury increased 58 basis points over the quarter, moving from 0.36% on December 31st, to 0.94% at the end of the first 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 fourth quarter GDP print was 4.3% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2021 around 5.7% with inflation expectations around 2.4%.iii

Being a more conservative asset manager, Cincinnati Asset Management Inc. does not buy CCC and lower rated securities. This policy generally served our clients well in 2020. However, the lowest rated segment of the market outperformed in the first quarter of 2021. Thus, our higher quality orientation was not optimal during the period. As a result and noted above, our High Yield Composite gross total return did underperform the Index over the first quarter measurement period. With the market staying positive during the first quarter, our cash position remained a drag on overall performance. Additionally, our credit selections within the consumer non-cyclical sector were a drag on performance. Within the energy sector, our higher quality selections were considered a negative to relative performance as the riskiest segment of the sector performed extraordinarily well. Benefiting our performance was our underweight in the utilities sector. Further, our overweight in the transportation sector, and our credit selections within that sector were a positive.

The Bloomberg Barclays US Corporate High Yield Index ended the first quarter with a yield of 4.23%. This yield is up from the new record low of 3.89% reached in mid-February of this year. The market yield is an average that is barbelled by the CCC-rated cohort yielding 6.55% and a BB rated slice yielding 3.40%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), had an average of 23 over the quarter.

For context, the average was 15 over the course of 2019 and 29 for 2020. The first quarter had 4 bond issuers default on their debt. The trailing twelve month default rate was 4.80% with the energy sector accounting for a large amount of the default volume. Excluding the energy sector from the calculation drops the trailing twelve month default rate to 2.55%.iv The current 4.80% default rate is relative to the 3.35%, 6.19%, 5.80%, 6.17% default rates for the first, second, third, and fourth quarters of 2020, respectively. Pre-Covid, fundamentals of high yield companies had been mostly good and with the strong issuance in each of the last four quarters, companies have been doing all they can to bolster their balance sheets. From a technical view, fund flows did turn negative in February and March, and the year-to-date outflow stands at $4.6 billion.v High yield certainly had some volatility in 2020; however, the market did ultimately provide a positive total return. 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 2020 High Yield Market was definitely one for the history books. The actions by the Treasury and the Federal Reserve no doubt helped to put in a bottom and provide a backstop for the capital markets to begin functioning amid the Covid pandemic. Generally speaking, the market has recovered. Additionally, the economy is projected to have solid growth over the course of 2021 given the trillions of stimulus that has been put into the system. The vaccine rollout continues and according to the CDC, 32% of the US population has received at least one shot. President Biden recently laid out a $2.25 trillion US infrastructure proposal. Headlines of political wrangling are likely to be front and center this year and perhaps provide some market opportunities. Clearly, it is important that we exercise discipline and selectivity in our credit choices moving forward. We are very much on the lookout for any pitfalls as well as opportunities for our clients. We will continue to carefully monitor the market to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis. It is important to focus on credit research and identify bonds of corporations that can withstand economic headwinds and also enjoy improved credit metrics in a stable to improving economy. 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 through such a historic 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. 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.

i Bloomberg April 1, 2021: OPEC+ to Ease Oil Output Cuts in Cautious Bet on Recovery
ii Bloomberg March 25, 2021: Powell Says Fed Won’t Stop Until US ‘All But Fully Recovered’

iii Bloomberg April 1, 2021: Economic Forecasts (ECFC)
iv JP Morgan April 1,, 2021: “Default Monitor”
v Wells Fargo April 2, 2021: “Credit Flows”

20 Mar 2020

Corporate Bond Market Update

It was a difficult week for the Corporate Bond market as fear and uncertainty related to COVID-19, a precipitous drop in oil, and an inter-meeting rate cut by the U.S. Federal Reserve drove Treasuries lower and spreads wider.

When we look at the Investment Grade market the option adjusted spread on the Bloomberg Barclays US Corporate Index was 122 at month-end February 2020, while on Friday, March 13, 2020 it closed at 216. This was one of the quickest and most volatile spread moves in the history of the investment grade credit market.

(Source: Bloomberg)

There was a corresponding move lower in Treasuries across the board – this helped to mitigate some, but not all, of the impact of widening spreads.

(Source: Bloomberg)

To provide some context on the performance of the investment grade credit market, through the end of the day on Friday March 13, the Bloomberg Barclays US Corporate Index posted a YTD gross total return of -1.88%. Comparatively, the S&P 500 YTD gross total return was -15.73% (Source: Bloomberg). While we are not happy to see negative returns in the corporate bond market, the asset class has performed as expected during a period of extreme volatility, and it has held up materially better than equities and other risk assets.

CAM does not provide intra-monthly performance figures, however as of March 13, 2020 we note that CAM’s portfolio has the following defensive characteristics relative to the Index. CAM is significantly underweight in BBB rated corporate credit relative to the Index. CAM caps its exposure to BBB-rated credit at 30% while the Corporate Index’s exposure was 49.14% as of March 13. Interestingly, the BBB concentration of the Index is down slightly YTD but that is merely because some large issuers, like Kraft-Heinz, were downgraded from BBB to junk status – an example of the type of investment CAM seeks to avoid through its bottom up research process. The second and third major factors that will impact CAM’s performance relative to the Index relate to individual credit selection and avoidance of certain industries which have been particularly hard hit by COVID-19, such as Leisure. To be sure, we have individual credits within our portfolio that have been affected by both COVID-19 and the decline in the oil market and we are constantly monitoring and evaluating those situations through active management of the portfolio.

It was also an exceptionally difficult week for the High Yield market with a one-two punch of fear and uncertainty related to COVID-19 as well as a complete flush of the oil market due to the lack of an OPEC agreement. The option adjusted spread on the Bloomberg Barclays US Corporate High Yield Index spiked above 700 for the first time since the commodity fueled rout of 2016. The Index YTD gross total return was -8.84% through the end of Friday March 13 (Source: Bloomberg).

(Source: Bloomberg)

Again, CAM does not provide intra-monthly performance figures, but our High Yield portfolio has the following defensive characteristics relative to the Index. CAM had over 10% of its portfolio in cash at the start of the current sell-off in February and CAM is underweight, or zero weight, some sectors of the market that were particularly hard hit by this sell off, such as Oil Field services. To be sure, our portfolio’s gross total return was negative as of February 29, 2020, and subsequent drawdown has been widespread. We have a number of credits that have experienced increased volatility and as always we are closely monitoring those situations as well as all the credits in our portfolio. Currently, we are comfortable with the individual credit metrics of our holdings and we believe the overall portfolio is well positioned should the economy enter a recessionary environment. Our cash balance also affords us the ability to be opportunistic on behalf of our clients as those situations arise.

The High Yield market can be extremely volatile in times of stress. It is not as deep or as liquid as the Investment Grade credit market and that is one of the reasons that spreads can gap wider so quickly. The growth of ETFs has exacerbated this problem as they are often forced to sell in the face of investor liquidations. We would caution that during times like these it can be difficult to achieve favorable pricing when looking to sell a high yield security; and depending on your risk tolerance it can often be a good opportunity to buy. We ask that our investors continue to trust that we will professionally manage your portfolios with a long-term objective and through the extent of the current downturn to the best of our ability.

We believe it is important in times like these to remind our investors of our investment philosophy and process at CAM. While volatile markets present challenges as well as opportunities, the way we manage money remains very consistent. We are conservative investors of domestic corporate bonds with a “bottom-up value” investment discipline, stressing first and foremost the preservation of capital, with an important secondary focus on total return. We seek to deliver these results by identifying quality businesses that we are comfortable owning in all markets.

We take the responsibility of managing your money very seriously and we will always do our best to perform that task to the highest standard of care. We sympathize with our clients in uncertain times such as these and we hope that you and your families stay safe and healthy.

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. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. High Yield bonds present risks specific to below investment grade fixed income securities. Valuation may result in uncertainties and greater volatility, less liquidity, widening credit spreads, and a lack of price transparency. Investments in fixed income securities may be affected by changes in the creditworthiness of the issuer and are subject to nonpayment of principal and interest. The value of fixed income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. 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.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

16 Mar 2018

High Yield Weekly 03/16/2018

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.2 billion and year to date flows stand at -$17.4 billion. New issuance for the week was $8.9 billion and year to date HY is at $49.2 billion, which is -25% over the same period last year.


(Bloomberg) High Yield Market Highlights

  • Junk bonds showed some signs of exhaustion as yields rose for several consecutive sessions, with CCC yields rising to a 12-mo. high; as stocks tumbled and the VIX rose for three consecutive sessions. CCC yields have been rising steadily in 7 of last 10 sessions.
  • Junk investors, though weary and wary, embraced CCC credits and made a beeline for them in the primary market, with two deals for ~$1b pricing
  • NVA Holdings, CCC credit, got orders more than 3x the size of the offering and priced through talk, suggesting risk appetite was robust
  • Guitar Center, CCC-rated and a distressed issuer, was welcomed by investors and priced at the middle of talk
  • CCCs still beat BBs and single-Bs with positive YTD returns of about 0.8%, showing investor appetite for risk was still alive
  • BBs continued to be the worst performer with negative YTD returns of about 1.3%
  • Junk bond market was also stronger qualitatively, with issuers rated B3 and lower declining in numbers; Moody’s notes that issuers rated B3 and lower dropped to 13%, below the long-term average of 15% for the 6th straight month


(International Financing Review) Sprint launches near US$4bn spectrum bond

  • Telecom carrier Sprint raised almost US$4bn from a financing backed by its spectrum, a deal some analysts say will further boost its liquidity and help better prepare for a potentially tough year ahead.
  • The deal launched roughly in line with price talk
  • “Spectrum is its most viable assets, and that’s why it is borrowing against it,” an investor said.
  • The cost of financing for Sprint, rated junk itself, was also cheaper than available in the high-yield market. Sprint’s US$1.5bn junk bond sale last month – the company’s first in three years – came with yields of 7.625% for eight-year debt.
  • “We are encouraged by Sprint’s efforts to diversify its financing sources and use its under-utilized spectrum to secure more attractive pricing,” CreditSights analysts said.
  • They predict a bumpy year ahead for the company, earning that Sprint could burn through cash as it ramps up network capex and focuses on moving customers to leasing plans. That comes as the company faces some significant debt maturities.
  • The analysts note the company has amended its outstanding spectrum-backed note indenture to allow for the issuance of spectrum-backed notes in excess of the US$7bn that will be reached after its latest ABS.
  • “We would not be surprised to see the carrier explore new secured financing alternatives to bolster its cash position,” said CreditSights.


(Fierce Cable) Is SoftBank back on the Charter hunt? Reportedly buys 5% of cable operator’s stock

  • Japan’s SoftBank has laid the groundwork for a $100 billion takeover of Charter Communications by its U.S. mobile operator Sprint Communications, the London Times reported over the weekend.
  • The Times said that led by billionaire Masayoshi Son, SoftBank has quietly purchased 5% of Charter stock in recent weeks.
  • Neither Charter nor Sprint has commented on this report.
  • Last summer, Charter rebuffed a SoftBank merger offer of $540 a share at a time when the cable operator’s stock was trading in the low $400 range. Liberty Media kingpin John Malone, Charter’s biggest shareholder, was reported to be in favor of the deal. Also enthusiastic was the Newhouse family, who became influential Charter shareholders when the cable company bought Bright House Networks.
  • Charter’s management team, led by Chairman and CEO Tom Rutledge, has been resistant of a takeover, while still keen on actualizing the value of fully digested integrations of 2016 acquisitions Bright House and Time Warner Cable.


(PR Newswire) Huntsman Acquires Demilec, a Leading North American Spray Polyurethane Foam Insulation Manufacturer

  • Demilec has annual revenues of approximately $170 million and two manufacturing facilities located in Arlington, Texas and Boisbriand, Quebec where they produce a full suite of MDI based SPF formulations which they market directly to applicators as well as through distributors. Demilec specializes in both closed cell and open cell formulations, with a focus on products with renewable and recyclable content that are eco-friendly, bio-preferred and reduce energy consumption through highly efficient insulation properties.
  • Under terms of the agreement, Huntsman will pay $350 million in an all-cash transaction, funded from available liquidity. Based upon full year 2018 EBITDA estimates, this represents a purchase price multiple of approximately 11.5x or 7.5x, pro forma for synergies. The transaction is expected to close by the end of second quarter 2018.
  • Peter Huntsman, Chairman, President and CEO commented: “This bolt-on acquisition is a great fit to our core strategy to move downstream. The integration of Demilec into our Polyurethanes business offers significant synergies and delivers substantially higher and very stable margins by pulling through large amounts of upstream polymeric MDI into specialized spray foam systems. This integrated business will have greater than 25% EBITDA margins and double digit growth.”
09 Mar 2018

High Yield Weekly 03/09/2018

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.8 billion and year to date flows stand at -$17.1 billion. New issuance for the week was $4.9 billion and year to date HY is at $40.2 billion, which is -23% over the same period last year.


(Bloomberg) High Yield Market Highlights

  • Junk bonds, though cautious overall, ignored stumbling stocks as issuance continued its steady pace, with Teva Pharmaceuticals pricing through price talk and increasing the size of the offering.
  • Junk bonds were impervious to wide-spread fears of a possible trade-war as investors saw that as just noise, and that has now become evident in the introduction of new exemptions from the proposed tariff
  • High yield investors shrug off any talk of rise in rates as the 10 year yield has stayed flat or range bound in the last four weeks
  • While junk bond yields dropped a tad in sympathy with steadily declining oil prices, there was no material collapse of the market, as was evident in the new issue market, which added a CCC-rated FTR to the calendar after pricing TEVA
  • CCCs continued to outperform BBs and single-Bs with YTD positive returns of about 0.8%
  • Goldman Sachs, however, cautioned against CCCs and recommended BBs


(Bloomberg) Sinclair Making Progress Toward FCC Nod on Tribune

  • Sinclair’s latest FCC filing shows progress on looming issues in the review of its Tribune acquisition. FCC approval is likely in 2Q, after the Justice Department finishes its work. The FCC will now take public comment on Sinclair’s divestiture plan. Sinclair’s bigger risk likely comes after the deal closes, from litigation over the FCC’s UHF discount.
  • Sinclair’s March 7 update to the FCC indicates that the company is making progress on work needed to get approval of its Tribune M&A. The company now says it seeks to use a recently relaxed FCC rule to own top-four rated stations in only two markets; it abandoned its request for the Harrisburg, Pennsylvania, market. To satisfy a national cap, Sinclair will divest stations in Chicago, New York, and San Diego. The fact that Sinclair will still provide service to some of those stations isn’t likely to dissuade FCC Republicans from backing the deal.
  • The FCC’s review of the Sinclair-Tribune deal will likely stretch into 2Q, after Sinclair on March 7 amended its application to address divestitures. The FCC will now probably set a brief period to take public comments on the issue. It will then likely take weeks to reach a decision. Sinclair said it plans to sell stations in nine markets where it would otherwise have two top-four stations. It also said it would like to retain two top-four stations in two markets. Justice Department approval will likely come first.


(Bloomberg) Community Health’s Loan Is Said to Fall After Rating Downgrade

  • Community Health’s outstanding $1.9b term loan H dropped to almost a point, after Moody’s downgraded the hospital operator to Caa1 from B3, according to people familiar with matter.
  • The Company’s outstanding $1.037b term loan G also fell about a point
  • The ratings cut “is driven by material erosion in financial performance over the last six months and a lower earnings and cash flow outlook for 2018″: Moody’s
  • Moody’s now expects adjusted debt/EBITDA to remain above 7.5x over the next 12-18 months
  • First Lien secured ratings also downgraded to B2 from Ba3


(Business Wire) Frontier Communications Announces $1.6 Billion Second Lien Secured Notes Offering

  • Frontier intends to use the proceeds from the offering to finance the cash consideration payable in connection with its previously announced offers to purchase for cash certain of its senior notes maturing in 2020, 2021, 2022 and 2023 and to pay related fees and expenses.


(CAM Note) Moody’s downgraded Frontier Communications debt one notch to Caa1

09 Mar 2018

Investment Grade Weekly 03/09/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of March 1-March 7 were a positive $577 million.  This is in contrast to Lipper data, where IG saw its second outflow YTD with an exodus of $740 million from IG funds.  HY outflows continue, and now there have been 8 consecutive weeks of HY outflows for Lipper reporters.  Over $16.6 billion has exited HY over that time period, the largest high-yield outflow streak on record.

The IG new issue calendar saw the most active week of the year, with much of the activity driven by CVS’s $40 billion issuance across 9 tranches.  The $40bn deal was the third largest corporate bond deal on record behind Anheuser-Busch InBev’s 2016 $46bn deal and Verizon’s 2013 $49bn deal.  Appetite was robust for the CVS issuance due to attractive concessions and plenty of portfolio capacity for the issuer –the bonds are currently 10-20 basis points tighter across the curve from where the deal priced.  The strong payroll data has brought a couple of IG issuers into the market as we go to print on Friday morning.  All-in total corporate issuance should end the week at nearly $50bln.  Corporate issuance is down 12% y/y but there are several large M&A related deals waiting in the wings that could narrow this gap substantially in the coming weeks.

The Bloomberg Barclays US IG Corporate Bond Index opened on Friday with an OAS of 100 on par with its YTD wide of 100.  The YTD tight on the index in 2018 was 85, the tightest level since 2007, when spreads bottomed at 82.  The all-time tight was 54 in March of 1997 and the all-time wide was 555 in December 2008.  2017 wide/tight was 122/93.


(Bloomberg) U.S. Added 313,000 Jobs in February; Wage Gains Cool to 2.6%

  • Payrolls rose 313,000 in February, compared with the 205,000 median estimate in a survey of economists, and the two prior months were revised higher by 54,000, Labor Department figures showed Friday. The jobless rate held at 4.1 percent, the fifth straight month at that level. Average hourly earningsincreased 2.6 percent from a year earlier following a downwardly revised 2.8 percent gain.
  • U.S. stock futures and bond yields rose, as the report signaled the labor market remains strong and will keep driving economic growth. The wage figures show a cooling from a pace that spurred financial turbulence last month on concern that the Federal Reserve could raise interest rates faster. While the unemployment rate remains well below Fed estimates of levels sustainable in the long run, the rise in participation suggests the presence of slack that would keep policy makers to a gradual pace of hikes.

(Bloomberg) CVS Builds $120b Book, Pays Palatable Concessions


  • CVS Health Corp. paid about 18 basis points on average to price the $40 billion bond leg of its proposed acquisition of Aetna Inc. in the third largest U.S. dollar corporate debt offering ever. The company is said to have built orders surpassing $120 billion, or 3 times covered, at the guidance phase.
    • New issue concessions ranged from 10-25bps, levels agreeable to the issuer given the size and scope of this deal. Concessions included 25bps on the $9b 10-year and 15bps on the $8b 30-year. Many were looking for this trade to strengthen a credit market that’s softened in recent weeks.
    • Relative valuation is challenging for a trade of this size, given the high visibility and larger credit spread widening.
  • Word that a deal was in the works started circulating around February 21 when the 10-year was trading around +120. Those bonds widened out to +135 by March 1, when the investor meetingswere disseminated to the market suggesting a deal was imminent.
  • So where is the “pure trade” before the transaction is priced into the market? Sticking to a method of using trades prior to announcement gives us T+132 on the 10-year, suggesting that the new issue concession on the 10-year was 25bp.(Bloomberg) Blackstone’s Goodman Says High Yield Faces Needed Disruption


  • “Rising rates is going to create volatility, particularly in the high-yield bond market,” Goodman, the co-head of Blackstone Group LP’s $132 billion GSO Capital Partners credit business, said in a Bloomberg Television interview in New York. “We need that dislocation — that disruption — to find new things to invest in.”
  • Goodman said he expects the average spread on high-yield bonds, currently about 340 basis points over rates on comparable Treasuries, to widen to widen to 700 basis points in the next two to three years. Spreads haven’t been that wide since oil prices reached a bottom in early 2016.
  • Distressed and mezzanine investors like GSO and rival Oaktree Capital Management have been patiently waiting for rates to rise, as a glut of yield-hungry investors have made slim pickings for credit firms. GSO has $25 billion of dry powder — money sitting on the sidelines, waiting for investment opportunities — while Oaktree has $20 billion, according to a recent filing.
  • “As spreads widen you’re going to find lots of investors coming back in to that market,” Goodman said.
02 Mar 2018

High Yield Weekly 03/02/2018

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.5 billion and year to date flows stand at -$15.3 billion.  New issuance for the week was $0.8 billion and year to date HY is at $35.0 billion, which is -12% over the same period last year. 


(Bloomberg)  High Yield Market Highlights

  • Junk bond investors continued to be wary amid tumbling stocks and rising volatility, with the VIX rising for three consecutive sessions and closing at a two-week high yesterday.
  • Stocks saw the biggest decline in three weeks and closed at a two-week low as markets could not get a break to consolidate after digesting the Fed chair Powell’s assessment of the economy, following the new tariff proposal of 25% and 10%, respectively, on aluminum and steel
  • Amid all the hullabaloo over a possible trade war, junk bond yields were resilient


(Modern Healthcare)  20 states sue federal government to abolish Obamacare

  • Twenty states sued the federal government on Monday to end the Affordable Care Act, claiming the repeal of the individual mandate’s tax penalty rendered the law unconstitutional.
  • The U.S. Supreme Court upheld the ACA in 2012, determining President Barack Obama’s healthcare reform law was a tax penalty. But the tax cuts signed by President Donald Trump in December zeroed out the penalty, and the rest of the ACA can’t stand as law without it, according to the states.
  • Health insurance is regulated by the states, but the ACA required states to create or adopt exchanges where individuals could purchase plans. The law also imposed certain requirements on plans, including covering pre-existing conditions.
  • Since Trump signed the tax cut law, some states have taken action to stabilize their individual markets. In January, Wisconsin’s Republican Governor Scott Walker urged the state legislature to pass a reinsurance program that would help minimize rate increases for residents. Idaho’s GOP Governor Butch Otter has issued an executive order that would allow insurers to sell plans that don’t comply with the ACA, as long as they also have compliant plans for sale in the state.


(Barron’s)  Frontier’s Disappearing Dividend Shouldn’t Have Surprised Anyone

  • Frontier Communicationsannounced it was suspending its dividend following its fourth-quarter earnings report.
  • Frontier said it lost $13.92 a share in the quarter, which included an impairment charge, on revenue that fell to $2.2 billion but beat forecasts for $2.1 billion. Ebitda came in at $919 million, ahead of the Street consensus for $911 million.


(Bloomberg)  AES issues new debt and tenders for existing notes

  • The AES Corporation issued $1.0 billion aggregate principal amount of senior notes. $500 million senior notes due 2021 priced at 4% while $500 million senior notes due 2023 priced at 4.5%. AES intends to use the net proceeds from the offering of the Notes to fund the concurrent tender offer announced to purchase AES’ outstanding 8.00% senior notes due 2020 and 7.375% senior notes due 2021 (together, the “Outstanding Notes”) and to pay certain related fees and expenses. AES intends to use any remaining net proceeds from this offering after completion of the tender offer to retire certain of its outstanding indebtedness. In conjunction with the tender offer, the Company is soliciting consents to the adoption of certain proposed amendments to the indenture governing the Outstanding Notes to alter the notice requirements for optional redemption with respect to each series of Outstanding Notes.


(Bloomberg)  Teva Selling $3.5 Billion of Junk Bonds to Refinance Debt

  • Teva Pharmaceutical Industries Ltd., in its first offering as a high-yield issuer, is selling $3.5 billion of bonds to refinance debt.
  • The drugmaker will have to bear higher interest costs to push out maturities as a massive debt load and weakening sales of a top product have cost it its investment-grade ratings. Teva is selling 1 billion euros ($1.22 billion) and $2.25 billion of debt, it said in a statement. The European offering will include maturities of four and seven years, according to people with knowledge of the matter.
  • In early discussions with investors, the six-year dollar notes have been marketed at a yield of around 6.5 percent, while the bonds due in 10 years are being offered at about 7.25 percent, said a person familiar with the deal, who asked not to be identified as the details are private. Teva’s outstanding 10-year notes due 2026 currently yield about 5.9 percent, according to Trace bond price data.
  • “That’s enough of a concession that people are going to look at it,” said John Yovanovic, a high-yield portfolio manager at PineBridge Investments LLC. “This is going to get a lot of attention.”
23 Feb 2018

High Yield Weekly 02/23/2018

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at -$14.7 billion. New issuance for the week was $4.8 billion and year to date HY is at $34.5 billion, which is -7% over the same period last year.


(Bloomberg) High Yield Market Highlights

  • Junk bond yields were at two-week lows across ratings amid lackluster stocks and a drop in VIX. Oil was steady and well above the $60 mark bolstering junk bonds.
  • However, the recent turbulence in equity volatility amid fears of an accelerated pace in rate hike following strong economic data, took its toll on junk bonds forcing JPMorgan to lower its spread and returns forecast for 2018
  • Spread forecast was revised to +375bps from +390 and returns to 4.60% from 5.5% earlier
  • High yield still offers 5.6% return from here
  • It is still likely to outperform most fixed income asset classes, JPMorgan wrote
  • Recall that the recent turmoil caused the yield to rise to a 14-mo. high and the 10Y treasury yield jumped 30bps by the end of January to 2.70 and 52bps YTD to close at 2.92% yesterday
  • High yield was back to business this week with yields steadily declining and issuance gaining traction
  • While issuance was slow and cautious this month, four more deals for $1.5b priced yesterday, taking the WTD total to $4.85b and MTD to $10.725b
  • Investors seem to return to junk bonds as retail funds report a modest inflow of $160m at close on Tuesday
  • Investor interest in junk bonds was also evident in the primary market with a CCC- credit, Weatherford International, driving by and pricing at talk even amid wobbly stocks
  • Earlier in the week, Sprint had orders of ~$3.75b and increased the size of the offering by $500m to price at the tight end of talk; talk tightened 25bps from the initial whisper of 8% area


(CNBC) Fed minutes: All signs pointing to more rate hikes ahead

  • FOMC members said they have revised upward the economic projections they made at the previous meeting in December.
  • The January meeting was the last one for Chair Janet Yellen, who had guided the Fed through the first rate normalization steps a decade after the financial crisis.
  • Markets already were on edge after the January Fed meeting, during which the committee said it expected that “further gradual adjustments” in monetary policy.


(Forbes) Rite Aid’s PBM Becomes More Attractive Under Albertsons

  • Whether Rite Aid keeps its pharmacy benefit manager or decides to sell it one day, the PBM’s potential value could take off under the umbrella of the large grocery store chain Albertsons.
  • Even before this week’s announcement that Albertsons would buy Rite Aid, the pharmacy chain’s executives were talking up the PBM EnvisionRxOptions as the “growth engine” for the entire company. Those optimistic statements came in early January even as Rite Aid began the process of transferring hundreds of drugstores to Walgreens Boots Alliance, turning the chain into a regional player with only 2,500 or so drugstores.
  • But Rite Aid’s sale to Albertsons will make the drugstore chain and its PBM a national player again . The combination of Albertsons and Rite Aid will create a chain with 4,345 pharmacies in stores spanning across 38 states and Washington, D.C.
  • Processing more prescriptions helps pharmacies as well as PBMs like EnvisionRx. PBMs are the middlemen between drug makers and patients when it comes to buying prescription drugs and getting discounts for their customers. Having a high prescription count helps PBMs gain leverage on behalf of their clients who are employers and government health programs such as Medicare’s part D drug benefit coverage for seniors.
  • In the past two years, Wall Street analysts and other observers of Rite Aid were worried EnvisionRx would lose employer clients and scale amid noise surrounding the uncertainty of its sale to Walgreens. That deal went from an outright sale to a partial deal last September when Walgreens agreed to buy just 1,932 Rite Aids following antitrust scrutiny from the Federal Trade Commission.
  • Merging with Albertsons gives EnvisionRx a larger platform to do business, executives say.


(Wall Street Journal) Dish Network Gains Sling TV Subscribers but Retention Is a Problem

  • Dish Network said its Sling TV streaming-video service has signed up 2.2 million subscribers in the company’s first disclosure of a figure, but Chairman Charlie Ergen said customer retention is a significant challenge.
  • Dish launched the streaming service nearly three years ago in an attempt to lure younger viewers and people giving up cable TV. The hope was that it would be an avenue for growth as Dish’s traditional satellite TV business declines.
  • The number of Sling TV customers grew 47% compared with the year-ago period, but it wasn’t enough to offset a 9.4% decline in satellite TV subscribers. The company finished the quarter with 13.2 million subscribers overall, including Sling and satellite customers, down from 13.7 million subscribers last year. In the fourth quarter, satellite TV subscribers fell by 121,000.
  • Sling TV added 711,000 subscribers in 2017, below the 878,000 in the previous year. Growth slowed partly because of increased competition with other streaming services.