Author: Josh Adams - Portfolio Manager

17 Jan 2020

CAM Investment Grade Weekly Insights

It was another busy week in the corporate credit markets; inflows remained robust, the new issue calendar continued to hum and the secondary market featured buyers grabbing for yield.  Risk markets have been incredibly resilient as they have shrugged off geopolitical turmoil and they seem to have little interest in impeachment or the upcoming presidential primaries and election.  The spread on the corporate index is one basis point tighter on the week, currently trading at 95.  The range in spreads on the index thus far in 2020 has been tight at just three basis points.

 

 

The primary market was busy again with more than $35bln in new debt coming to market on the heels of $60bln+ the week prior.  Demand was very strong as order books were well oversubscribed, even for companies with marginal credit metrics.  It is early in the year but so far new issue supply is 32% higher relative to last year, according to data compiled by Bloomberg.  Recall that CAM’s projection as well as the general consensus is calling for overall supply in 2020 to be down relative to 2019 especially on a net basis.  We expect that issuers will look to be quite active in the first half of the year and that issuance will be more subdued in the second half due to the uncertainty that typically accompanies a presidential election.  The consensus supply number for January is $120bln, according to data compiled by Bloomberg, so next week should be another solid week for issuance but will likely be somewhat lower than the previous two weeks due to earnings blackout periods.

According to Wells Fargo, IG fund flows during the week of January 9-15 were +$5.5bln.  This brings year-to-date IG fund flows to over $15.5bln, a strong start to the year.

 

(Bloomberg) That $1 Trillion BBB Powder Keg Worries Credit Investors Again

 

  • Investors raised doubts about BBB debt in late 2018, when General Electric Co. was in crisis, its bonds tanked, and investors fretted about market turmoil from mass downgrades. Those fears proved misplaced last year, when investors stampeded into BBB notes and crushed risk premiums on the securities to around their lowest level since the financial crisis. Those narrow risk premiums are what worry at least some money managers.
  • Because BBBs make up more than half the $8.4 trillion investment-grade corporate markets in both the U.S. and Europe, there’s that much more debt at risk of possibly falling to speculative grade. In 1993, BBBs were more like a quarter of the market.
  • Signs of trouble for BBB companies have started brewing this year. Italian infrastructure company Atlantia SpA lost its last remaining investment-grade rating this week, and Boeing Co.’s biggest Max supplier, Spirit AeroSystems Holdings Inc., has also fallen into junk.
  • Some money managers are focusing on finding bargains among BBB notes. Many of the largest BBB constituents gorged on debt to fund M&A, bringing their total obligations in 2018 to around $1 trillion, according to a Bloomberg analysis. Some of those companies have put debt reduction at the forefront, selling assets and cutting dividends to free up cash. That helped make GE, AT&T and AB InBev among 2019’s best corporate bond investments.

 

 

20 Dec 2019

CAM Investment Grade Weekly Insights

Another week has come and gone and corporate bonds continue to inch tighter into year end.  The OAS on the Bloomberg Barclays Corporate Index opened the week at 99 and closed at 95 on Thursday.  Spreads are now at their tightest levels of 2019 and the narrowest since February of 2018 when the OAS on the index closed as low as 85.  Price action in rates was relatively muted during the week amid low volumes but Treasuries are set to finish the week a few basis points higher.  The 10yr opened the week at 1.87% and is trading at 1.91% as we go to print.

As expected, the primary market during the week was as quiet as a church mouse.  December supply stands at a paltry $18.9bln according to data compiled by Bloomberg.  2019 issuance stands at $1,110bln which trails 2018 by 4%.  As we look ahead to 2020, we expect robust supply right of the gates in January but the street consensus for 2020 as a whole is that supply will be down 5% relative to 2019.  Further, net supply, which accounts for issuance less the 2020 maturity of outstanding bonds, will be down substantially from prior years.  If these forecasts come to fruition then the supply backdrop could lend technical support to credit spreads in 2020.  Supply, however, is merely one piece of the puzzle.

According to Wells Fargo, IG fund flows during the week of December 12-18 were +$0.85bln.  This brings YTD IG fund flows to +$295bln.  2019 flows are up over 11% relative to 2018.

13 Dec 2019

CAM Investment Grade Weekly Insights

The grind continues as the OAS on the Bloomberg Barclays Corporate Index breached 100 for the first time in 2019 with a 99 close on Thursday evening.  The index has not traded inside of 100 since March of 2018 and has averaged a spread of 127 over the past 5-years and 113 over the past 3-years.  Treasuries were again volatile on the week, especially Friday, which saw a range of 15 basis points on the 10yr Treasury.  However, as we type this during the late afternoon on Friday it appears that the 10yr is going to end the week almost entirely unchanged from the prior weeks close.

The primary market has entered year-end Holiday mode. Less than $4bln in new debt was brought to market during the week.   The first half of next week is the last chance for meaningful issuance in the month of December.  According to data compiled by Bloomberg, 2019 issuance stands at $1,110bln which trails 2018 by 4%.

According to Wells Fargo, IG fund flows during the week of December 5-11 were +$5.4bln.  This brings YTD IG fund flows to +$282bln.  2019 flows are up over 10% relative to 2018.

 

 

 

15 Nov 2019

CAM Investment Grade Weekly Insights

Credit spreads are set to finish the week generally unchanged but may be a touch wider in some spots when it is all said and done.  The spread on the Bloomberg Barclays Corporate Index opened the holiday shortened week at 105 and closed at 106 on Thursday.  There is positive sentiment in the markets on Friday morning amid China-US trade innuendo out of Washington.  For the second week in a row we have seen a relatively significant move in treasuries; last week it was higher rates and this week lower.  The 10yr Treasury closed the prior week at 1.94% and is now 1.83%, 11 basis points lower on the week as we go to print.

The primary market posted an impressive haul this week, especially considering the fact that the market was closed on Monday.  It was the second largest volume week of the year thanks to a big boost from AbbVie, which printed a $30bln deal that featured 10 different maturities.  With one deal pending this morning, weekly issuance will come in at the $50bln mark.  Oddly enough both the largest and second largest issuance weeks in 2019 have both come on holiday shortened weeks.  The largest volume week was the week of Labor Day when nearly $75bln of new debt was priced in just four days. According to data compiled by Bloomberg, 2019 issuance stands at $1,065bln which trails 2018 by -4.4%.

According to Wells Fargo, IG fund flows during the week of November 7-November 13 were +$2.8bln.  This brings YTD IG fund flows to +$252bln.  2019 flows are up 9.5% relative to 2018.

 

 

Bloomberg) AbbVie Propels High-Grade Issuance to Year’s Second-Biggest Week

  • It’s the second-biggest week of the year for U.S. investment-grade issuance, which at about $50 billion in volume trails only the record-setting start to September.
    • AbbVie’s $30 billion deal on Tuesday clocked in as the year’s largest bond sale and the fourth-biggest ever, helping to establish this week’s second-place finish
      • Supply for the week stands at $49.4 billion as of Thursday with more deals potentially coming Friday given a shorter window to sell debt after Monday’s Veteran Day close
      • The first week of September saw $75 billion of high-grade bond sales, the most for any comparable period since records began in 1972
      • This week overtook the five days to May 9, when IBM and Bristol Myers brought $39 billion in acquisition-related supply in a 24-hour span

 

(Bloomberg) Here’s How KKR Might Just Pull Off the Biggest LBO in History

  • One of the private equity industry’s titans called it a “stretch,” and it’s been dismissed as a pipe dream by a bevy of analysts.
  • Yet interviews in recent days with debt-market specialists suggest that KKR & Co. could find a narrow path to finance what would be the biggest leveraged buyout in history: a potential take-private deal for pharmacy chain Walgreens Boots Alliance Inc. that analysts have estimated would need to be funded with at least $50 billion of debt.
  • The challenge for any Walgreens suitor will be raising the necessary money via the markets of choice for private equity firms — junk-rated loans and bonds — which have become fragile after an unprecedented borrowing binge left investors with a hangover. Debt funds that financed more than $3.5 trillion of leveraged buyouts in the past decade have become pickier, leaving banks stuck holding more than $2 billion of unsold loans on their balance sheets as recently as last month.
  • But a road map may be hidden in two other recent debt-fueled takeovers: Dell Technologies Inc.’s $67 billion takeover of EMC Corp. in 2016 and Charter Communications Inc.’s $78.7 billion acquisition of Time Warner Cable Inc. that same year.
  • Junk-rated Dell and Charter both borrowed heavily in the investment-grade bond market by issuing secured debt. T-Mobile US Inc. is going down a similar route to help pay for its purchase of Sprint Corp.
  • In Charter’s case, it pledged security to new and existing bonds issued by higher-rated Time Warner to ensure the debt remained investment-grade. Dell used a similar strategy when it bought investment-grade rated EMC. Walgreens’s debt could be segregated into two borrowing structures at a holding company level and an operating company portion, with investment-grade debt placed on the latter.
  • In doing so, Dell and Charter won access to the most stable part of the corporate debt market, where investors are still buying heavily as an alternative to low or negative-yielding assets elsewhere. At the same time, they limited their reliance on leveraged finance markets, where sentiment can shift quickly and prove costly.
  • Both companies did tap those markets, but with more manageable offerings. Bankers who asked not to be identified estimated that Walgreens would be able to raise between $10 billion and $20 billion of junk-rated debt to fund a buyout.
  • Other market participants, who asked not to be named because they weren’t authorized to speak publicly, said KKR still might need to find a deep-pocketed third-party investor to help put more equity into the deal.
  • Or it may seek to spin off a portion of Walgreens to lessen its financing needs. The company’s European operations could potentially bring in $18 billion to $20 billion, CreditSights analyst James Goldstein said in a phone interview.

 

08 Nov 2019

CAM Investment Grade Weekly Insights

Credit spreads were tighter during the week and are now at the tightest levels of 2019.  The spread on the Bloomberg Barclays Corporate Index closed at 105 on Thursday and there is a positive tone in the air on Friday morning which could lead to an even tighter close as we head into the long weekend –the bond market is closed on Monday in honor of Veteran’s Day.  The move in Treasuries during the week has more than overshadowed tighter credit spreads.  It has been a quick and violent move higher in rates.  As we go to print the 10yr Treasury is over 22 basis points higher on the week while the 30yr is 21 basis points higher.  Unpredictability in rate moves is the principal reason that we are “rate agnostic” at CAM and instead focus on credit risk while avoiding interest rate speculation by always positioning investor portfolios in intermediate maturities.

The primary market got a decent start to the month as $21.8bln in new debt came to market.  The pace should pick up substantially as soon as next week due to pending M&A funding from AbbVie which could total near $30bln. 2019 issuance has now passed the trillion dollar mark and it stands at $1,014bln which trails 2018 by -7%.

According to Wells Fargo, IG fund flows during the week of October 31-November 6 were +$3.2bln.  This brings YTD IG fund flows to +$249bln.  2019 flows are up 9.5% relative to 2018.

 

 

Bloomberg) Global Bond Sell-Off Persuades Some Investors to Buy the Dip

  • Recent losses in Treasuries, which crescendoed Thursday into one of the worst days since Donald Trump was elected president, look like a buying opportunity for many investors who have a grim view of the economy’s prospects.
  • And it appears some are pouncing, with traders cashing out bearish wagers and buy-the-dip buyers rushing in. The rekindled interest in the safety of bonds nudged yields on the 10-year, which had climbed to a three-month high of 1.97% on Thursday, down to as low as 1.89% in early European trading Friday before bouncing back to around 1.94%. European bonds rebounded after French and Belgian yields had climbed above 0% Thursday.
  • Signs of progress in U.S.-China trade talks have thrashed bonds for days, and the two countries agreed Thursday to roll back tariffs on each other’s goods if a deal is reached. The Treasury market has seen a huge turnaround since August, when fears that global growth is slowing prompted the biggest monthly rally since 2008.

 

 

(Bloomberg) U.S. Says Phase-One China Deal Would Include Tariff Rollback

  • The U.S. and China have agreed to roll back tariffs on each other’s goods in stages as negotiations continue over resolving the more than yearlong trade war, officials on both sides said.
  • “In the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement,” China’s Ministry of Commerce spokesman Gao Feng said Thursday.
  • White House economic adviser Larry Kudlow confirmed the advance in negotiations. “If there’s a phase one trade deal, there are going to be tariff agreements and concessions,” he told Bloomberg.
  • An agreement to ratchet back tariffs would pave the way for a de-escalation in the trade war that’s cast a shadow over the world economy. China’s key demand since the start of negotiations has been the removal of punitive tariffs imposed by Trump, which by now apply to the majority of its exports to the U.S.
  • “If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,” Gao said Thursday.
01 Nov 2019

CAM Investment Grade Weekly Insights

Credit spreads were turbulent during the week.  The first half of the week saw tighter spreads, and the OAS on the Corporate Index closed at 106 on Tuesday, the tightest level of 2019.  Spreads traded wider from there on the back of Fed commentary on Wednesday which was followed by a surprisingly weak Chicago PMI reading on Thursday morning leading to a close of 110 for the index on Hallows eve.  The economic news continued to roll in on Friday morning, but this time it was received in positive fashion as employment numbers beat market expectations.  As we go to print amid lighter volumes in corporates most bonds are trading 2-4 tighter which should see the index close right around 108.  If we do close at 108 then spreads will have finished the week unchanged.  Rates too were volatile during the week with the 10yr closing at 1.84% on Monday but it is now trading at 1.73% on Friday afternoon.  This is lower on the week, as the 10yr finished the week prior at 1.79%.

The primary market was somewhat more active this week but finished the month well shy of expectations.  October volume closed at $68.6bln versus dealer projections of $85bln according to data compiled by Bloomberg.  2019 issuance stands at $992bln which trails 2018 to the tune of -6%.

Demand for corporate credit continues to remain robust.  According to Wells Fargo, IG fund flows during the week of October 24-30 were +$4.2bln.  This brings YTD IG fund flows to +$246bln.  2019 flows are up over 9% relative to 2018.

 

 

(Bloomberg) Credit Risk Gauge Drops to Six-Week Low on Bullish Jobs Report

  • Investors pushed the cost to protect a basket of investment-grade company debt against default to the lowest level since Sept. 19 following the unexpectedly strong U.S. jobs report on Friday.
    • The Market CDX Investment Grade index spread fell as much as 2 bps to touch 52.96 bps Friday morning in New York before paring some of the gains to trade at 53.67 bps at 12:30 p.m, according to ICE Data Services. The index narrowed by the most in almost three weeks, data compiled by Bloomberg show.
    • Excess demand for higher-quality bonds and low supply have propelled gains in corporate investment-grade markets. October new IG issues ended at $68.6 billion, falling short of the $85 billion dealer projections by nearly 20%, while cash continues to flow intohigh-grade bond funds.

 

(Bloomberg) Riskiest Junk Debt Still Isn’t Cheap Enough to Lure Buyers

  • Notes rated in the CCC tier, essentially the lowest level in the junk bond market, have grown cheaper since May even as most of the market has grown stronger. Risk premiums, or spreads, on the debt are close to their widest level relative to the tier just above them since mid-2016, according to data compiled by Bloomberg.
  • The weaker performance of the lowest-rated debt underscores how even as investors are reaching for higher returns as the Federal Reserve eases interest rates, they’re still wary of a potential economic downturn and fear that defaults could start to tick higher. The highest tier of junk bonds have gained 13.5% this year, and overall high-yield corporate bonds are up 11.9%, while those rated CCC have gained just 5.7%.
  • CCC debt doesn’t usually perform like this. Because the companies that sell the notes are already so close to defaulting, CCC bonds are typically hit harder than the broad market during a market downdraft. When the market recovers, the securities often perform much better. The debt plunged in early 2016 when energy prices dropped, but went on to notch huge returns for the year — 31.5% to the broader market’s 17.1% — as oil prices started recovering.

This year, CCC bonds are performing worse than the market even as the overall supply of the lowest-rated notes has been shrinking. There are about $156 billion of those bonds outstanding today, down from $167 billion in February. So far this year, CCC rated companies have sold around $24 billion of debt, less than the same period for each of the previous two years, according to data compiled by Bloomberg.

 

Bloomberg) Top Fed Officials Hammer Home Message That Rates Are on Hold

  • Federal Reserve Vice Chairman Richard Clarida reinforced the central bank’s new message this week that interest rates are on hold, saying that both monetary policy and the U.S. economy are “in a good place,” though some risks remain.
  • “We have a favorable outlook for the economy,” Clarida said Friday in an interview with Jonathan Ferro and Tom Keene on Bloomberg Television. “We think the economy is in a good place, we think monetary policy is in a good place.”
  • He repeated that message in a lunchtime speech at the Japan Society in New York, with Fed Vice Chairman for Supervision Randal Quarles delivering a similar signal at an event at the same time at Yale University in New Haven, Connecticut.
  • The vice chairs’ overlapping remarks hewed closely to what Chairman Jerome Powell said earlier this week after the Fed cut rates for a third time this year, signifying a strong consensus at least among the Board of Governors. The Fed has acted to protect a record U.S. economic expansion amid headwinds from trade uncertainty and global weakness, while the domestic economy has been holding up.
25 Oct 2019

CAM Investment Grade Weekly Insights

Spreads are tighter to the tune of several basis points on the week while Treasury rates crept higher. The OAS on the Bloomberg Barclays Corporate Index was 110 on Friday morning after having closed at 112 the week prior. Spreads have continued to grind tighter throughout the day as we go to print on Friday afternoon and the close on the index OAS is likely to come close to touching the year-to-date tight of 108. Treasury rates are set to finish the week higher with the 10-year up 5 basis points on the week.

The primary market continued its October trend with another week of lackluster supply. Weekly new issue volume was just shy of $14bln pushing the monthly total to $39.5bln according to data compiled by Bloomberg. 2019 issuance stands at $963bln trailing 2018 by nearly 8% on a relative basis.

According to Wells Fargo, IG fund flows during the week of October 17-23 were +$4.4bln. This brings YTD IG fund flows to +$242bln. 2019 flows are up 9% relative to 2018.

 

 

Bloomberg) Bond Funds Learn to Exploit Ratings System to Buy Riskier Debt

  • In today’s low interest-rate world, investment-grade bond funds face an all-too-familiar trade-off: buy risky debt to improve returns or play it safe and underperform.
  • In particular, funds are loading up on bonds where ratings firms are split on whether they’re investment grade or junk. While reasonable people can disagree about which one is right, for a growing number of firms, the answer is always the same: the higher one.
  • The practice has obvious advantages. With high-grade corporate bonds yielding less than 3% on average, managers can pick up an extra half-percentage point on split-rated debt. And funds can say they’re invested in safe assets while running a portfolio that actually looks a lot like a junk bond fund.
  • Granted, managers have always had the discretion and the flexibility to choose which ratings standards to follow. The methodology is there for all to read in the fund’s prospectus, though it’s often tucked into the fine print. Then, there’s the question of how much stock to put into ratings anyway. Many managers lean on their own analysis to determine a bond’s credit risk.
  • That extra yield comes with a price. Historical data from S&P shows that lower initial ratings correspond with higher rates of default. The gap is notably stark in the divide between investment grade and junk. Ten-year default rates on bonds with BB ratings are double those with BBB grades.

 

(Bloomberg) Corporate Bond Syndicates Yawn Amid Sleepiest October in Years

  • S. investment-grade debt sales are expected to miss estimates for October — by a lot.
  • Just $39.5 billion of new debt has been sold as of Thursday, compared to initial forecasts calling for $85 billion. This projection, put together by compiling dealer estimates, was revised lower mid-month to around $65 billion and now even that may be a stretch.
  • Volume is the lowest since October 2013, when $41.9 billion of blue-chip company bonds was sold. There are still five trading days left, but that narrows to two when you consider Fridays are often blank, Wednesday is a Fed decision day and Thursday is Halloween.
    • The following factors likely play a role.
    • Big banks have been absent. Of the top 10 U.S. banks, just Bank of America Corp. and Wells Fargo & Co. have issued new debt, together totaling $10. 5 billion. Typically there is more, especially when financial institutions report better-than-expected earnings as Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. have.
    • Earnings season. Issuers and investors want to see how well companies have been doing. Buyers want to know about the recent quarter and fourth quarter outlook, considering the geopolitical risks such as the U.S.-China trade war and Brexit
    • Muted merger and acquisition activity. It’s widely understood that M&A issuance is down, but overall the calendar just seems lighter. Every once in a while there is a whisper about T-Mobile USA Inc., but at the moment that is looking more like a 2020 story.
  • Restart
    • Issuance will begin to pick up next week, albeit from a pretty low bar set in the last few weeks. Desks are expected to front-run the Fed and complete the bulk of next week’s debt issuance on Monday and Tuesday.
    • There are a plethora of companies expected to report next week. The week after next, earnings will subside and with the bulk of the reports released, more candidates will consider selling debt. The first week of November is when the real ramp up should occur.
    • The fact that October is running about 54% behind estimates doesn’t come as a surprise since actual supply has been missing weekly estimates for five weeks in a row. That trend is going to break as Wells Fargo’s $6.5 billion deal catapulted this week to $13.7 billion, in line with estimates of $15 billion area.

 

18 Oct 2019

CAM Investment Grade Weekly Insights

Spreads are tighter on the week amidst positive vibes in risk markets and the lack of meaningful new corporate supply.  The OAS on the Bloomberg Barclays Corporate Index is 113 on Friday morning after having closed at 115 the week prior.  Treasury rates have risen substantially since the beginning of October and the 10yr spent much of the week wrapped around 1.75%.

The primary market was subdued during the shortened week as the bond market was closed Monday for a federal holiday.  Weekly new issue volume was $10bln pushing the monthly total to $25.8bln according to data compiled by Bloomberg.  2019 issuance stands at $949bln.

According to Wells Fargo, IG fund flows during the week of October 10-16 were +$4.3bln.  This brings YTD IG fund flows to +$238bln.  2019 flows are up 9% relative to 2018.

 

(Bloomberg) Chief of Exelon Utility Business Retires Amid Federal Probe

  • The head of Exelon Corp.’s utility unit has abruptly retired amid a federal probe involving its lobbying in Illinois.
  • Anne Pramaggiore, senior executive vice president and chief executive officer of Exelon Utilities, is leaving “effective immediately,” the company said in a statement Tuesday. Calvin Butler Jr., chief of Exelon’s Baltimore Gas and Electric utility, was named as her interim replacement.
  • Pramaggiore’s departure comes less than a week after Exelon disclosed in a regulatory filing that it received a subpoena from federal prosecutors asking for information related to communications with Illinois State Senator Martin Sandoval. In July, Exelon disclosed it received a subpoena related to its lobbying activities in Illinois.
  • The Chicago Tribune reported earlier this month that federal agents had raided Sandoval’s office and were searching for information related to concrete and construction businesses and lobbyists and public officials. Officials were also looking for “items related to any official action taken in exchange for a benefit,” the Tribune reported, citing documents released by the Illinois Senate.
  • Exelon’s statement on Pramaggiore’s retirement Tuesday didn’t reference the subpoenas. Nor did it give a reason for her departure.
  • “We thank Anne for her valuable service,” Exelon CEO Chris Crane said in the statement. “We are confident this will be a smooth transition.”

 

(Bloomberg) High-Grade Corporate Bonds Trade Tighter as New Debt Sales Slump

  • Spreads on new high-grade corporate bonds tightened in secondary trading as debt issuance missed estimates for the fourth straight week.
    • Further outperformance in a market that has already enjoyed a 13% return this year should continue given the dearth of new supply and consistent fund inflows
      • Investors added $2.9 billion for the week ended Oct. 16, Refinitiv’s Lipper US Fund Flows data show, adding to $1.8 billion the prior period
    • All eight of the fixed-rate tranches sold this week are trading tighter, according to Trace data reviewed around 10 a.m. on Friday
    • Primary market sales disappointed again this week, with just $10 billion priced against estimates calling for $15 billion to $20 billion
      • 40% of this week’s volume was from one borrower — Bank of America’s $4 billion priced in two parts
      • Seven of eight bonds sold this week were from financial companies
    • Next week’s preliminary forecast calls for a total in the $15 billion area, with the possibility for an upside surprise should more banks come to the market
      • With 27% of the S&P 500 index companies reporting earnings next week, more corporate issuance is expected
      • Financial companies have dominated recent weeks
15 Oct 2019

2019 Q3 INVESTMENT GRADE QUARTERLY

Investment  grade  credit  markets  have  continued  to  enjoy  strong  performance  in  2019,  although  spreads showed little movement during the third quarter. The Bloomberg Barclays US Corporate Index  closed  the  quarter  at  an  option  adjusted  spread  of  115,  which  is  exactly  where  it  opened.   Coupon income and lower Treasury yields were the driving forces of positive returns during the quarter  as  the  10yr  Treasury  finished  the  quarter  at  1.66%  after  having  opened  at  2.01%.   While  Treasuries finished lower, the path was not linear and there was volatility along the way: the 10yr closed at a low of 1.45% on September 3, before rocketing higher to close at 1.89% on September 13,  a  massive  move  of  44  basis  points  over  the course of just eight trading days. Corporate  bond  returns  are  off  to  the  best  start through the first three quarters of any calendar  year  dating  back  to  2009  when  the  US Corporate Index posted a total return of +17.11%. Through the first 9 months of 2019 the Bloomberg Barclays US Corporate Index had a total return of +13.20%. This compares to CAM’s gross total return of +11.69% for the Investment Grade Strategy.

The Primary Market is Back, Bigly

Lower Treasuries, retail fund flows and foreign buyers who were faced with increasingly negative yields  in  many  local  markets  combined  to  lead  a  resurgence  in  the  primary  market  during  the  quarter.

September was one for the record books as companies issued $158bln in debt, making it the 3rd largest volume month in the history of the corporate bond market. According to data compiled by Bloomberg, issuance through the end of the third quarter stood at $923.6bln, trailing 2018’s pace by 3.9%.

Portfolio Positioning

While we at CAM are pleased with the year‐to‐date performance of our investment grade strategy, we  would  like  to  remind  our  investors  that  this  performance  has  occurred  over  a  very  short  timeframe. We strategically position our clients’ portfolios with a longer term focus and an emphasis on providing a superior risk‐adjusted return over a full market cycle. Amid such a strong start  to  the  year  for  credit,  we  would  like  to  illustrate  to  our  investors  how  we  are  positioning  portfolios for the longer term. While we do not seek to replicate or manage to an index, we do use the Bloomberg Barclays US Corporate Index as a benchmark for the performance of our strategy so this discussion will refer to that index as a tool to compare our relative positioning.

Credit Quality

CAM  targets  a  30%  limitation  for  BBB  exposure,  the  riskiest  portion  of  the  investment  grade  universe. There is an additional target of maintaining an overall portfolio credit quality rating of at least A3/A‐. The US Corporate Index was 50.39% BBB‐rated at the end of the third quarter with an average rating of A3/Baa1. While this high‐quality bias can cause CAM’s portfolio to underperform during periods of excessive risk taking, it should tend to outperform during periods of market stress. One of the tenets of our strategy is preservation of capital and our BBB‐underweight is helpful in achieving this goal for our investors.

Interest Rate Sensitivity

CAM avoids the fool’s errand of attempting to make tactical bets on the direction of interest rates. Instead we manage interest rate risk by positioning the portfolio in intermediate bonds that range in maturity from 5‐10 years. CAM will occasionally hold a security that is shorter than 5 years or longer  than  10,  but  very  rarely  does  so.   By  always  investing  in  intermediate  maturities,  CAM’s  seasoned portfolio is more conservatively positioned than the corporate index with a shorter duration and fewer average years to maturity.

Liquidity

Liquidity is always on our minds at CAM. Maintaining an intermediate maturity profile requires that we sell bonds prior to maturity so we must be sure that we will be able to effectively exit positions. CAM  targets  SEC‐registered  securities  that  have $300  million  minimum  par  amount  outstanding.

Additionally CAM attempts to cap its ownership exposure to 5% of any particular issue. By investing in larger more liquid issues and by limiting exposure to any particular issue it makes it easier to achieve best  execution  when  it  comes  time  to  sell.   CAM’s  US Corporate average ownership exposure per issue held at the $869 million end of the third quarter was 0.7%.

Diversification & Industry Sector Limitations
CAM diversifies client accounts by populating individual separately managed accounts with 20‐25 positions.   Additionally  CAM  imposes  a  20%  exposure  limitation  at  the  “sector”  level  and  a  15%  limitation at the “industry” level. As an example, “Capital Goods” is at the sector level and beneath that  sector  there  are  individual  buckets  at  the  industry  level,  such  as  Building  Materials.

CAM invests in bonds that we believe will add value to the performance of the portfolio. Because CAM does not manage to, or attempt to, replicate an index it does not encounter the problem of over‐diversification or of owning the bonds of an issuer simply because the issuer represents a large weighting within an index.

The Fed Strikes Again, Now What?
The FOMC lowered its target for the Federal Funds Rate twice during the quarter, once at its July meeting and then again in September. The current implied probability of a cut at its meeting at the end of October is around 60% but closer to 75% for the December meeting, as market participants’ views remain mixed on the possibility of further cuts in 2019. We believe that the Fed will abide by its commitment to data dependency. Economic data showing strength or resiliency will result in no further cuts in 2019, but data showing a deteriorating economic picture could mean that more cuts are on the horizon.

In  our  view,  the  biggest  factor  for  the  performance  of  risk  markets  through  year  end  hinges  on  trade. We believe that the markets are pricing in a China trade resolution over the medium term. If this does not come to fruition or if the U.S. and China become more antagonistic then a negative market reaction becomes more likely. Aside from being positioned more conservatively than the market  as  a  whole,  with  considerably  less  BBB  exposure  and  a  markedly  shorter  duration,  we  believe that we are furthermore better positioned regarding general economic sensitivity as well as, more specifically, Chinese trade exposure.

While the investment grade credit market has performed well, caution still rules the day. We will continue  to  position  portfolios  accordingly  with  an  eye  toward  the  longer  term.  Thank  you  for  entrusting us with the responsibility of helping you to achieve your financial goals.

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.

27 Sep 2019

CAM Investment Grade Weekly Insights

Spreads and Treasuries were range bound during the week and look likely to finish the week relatively unchanged.  It was a quiet week for credit which is unsurprising given that we are headed into quarter end.

The primary market kicked off September with its busiest week ever but the torrid pace of issuance has cooled considerably heading into month end.  Weekly new issue volume was $14.5bln pushing the monthly total to $154.9bln according to data compiled by Bloomberg, the fifth busiest month of all time.  2019 issuance trails 2018 by 3.9% on a year over year basis.

According to Wells Fargo, IG fund flows during the week of September 19-25 were +$2.9bln.  This brings YTD IG fund flows to +$216bln.  2019 flows are up 8.2% relative to 2018.

 

 

(Bloomberg) Sizzling Bond Market Draws Record Number of Blue-Chip Companies

  • This month has seen a record number of bond sales by blue-chip companies, incentivized by low interest rates and supercharged investor demand to refinance debt.
  • The market priced 127 deals, surpassing September 2017’s 110 offerings as the busiest month, based on Bloomberg records began going back 20 years. Total volume of $154.9 billion is still short of the $177 billion record set in May 2016. But with two days remaining in September, sales are poised to be the third-highest ever.
  • The surge in supply came as a growing pile of bonds offer negative yields overseas, driving investors desperate for higher returns into the U.S. corporate credit market. It marks a rare spike in borrowing that’s fueled by a broad-based rush to extend maturities, not driven by large M&A financing.

 

 

  • The first week of the month saw the highest weekly sales volume ever. Almost $75 billion was priced, led by bond sales for Walt Disney Co. and Apple Inc.
  • September is by far the most popular month for issuers, accounting for the top three months by deal count over the past 20 years. This month’s 127 total high-grade sales compares with 110 in 2017 and 100 in 2016, the second and third busiest months over the past 20 years.
  • The average deal count for September over the last 10 years is 88.