Author: Josh Adams - Portfolio Manager

CAM Investment Grade Weekly
08/03/2018

Corporate spreads remained firm this week. The OAS of the corporate index is 1 basis point tighter on the week as we go to print Friday morning.

According to Wells Fargo, IG fund flows for the week of July 26-August 1 were +$2.5 billion. IG flows are now +$79.8 billion YTD.

Per Bloomberg, $7.8 billion of new issuance printed during the week with no deals pending on Friday morning. Bloomberg’s tally of YTD total issuance stands at $699.784bn.

The 10yr Treasury closed above 3% on Wednesday but then retraced several basis points on Thursday. As of Friday morning, 10yrs are unchanged relative to the prior weeks close.

(Bloomberg) Internet Killed the Video Star. Charter Finds the Silver Lining.

• Charter Communications Inc. offered up more evidence Tuesday that cable companies may yet be able to weather the fallout from the dreaded cord-cutter.
• Charter reported second-quarter growth in internet subscribers and sales that beat analysts’ expectations. While the U.S.’s second-largest cable company lost 73,000 video subscribers, it was less than expected and the addition of 218,000 new internet customers helped soften the blow. That sent shares up as much as 7.1 percent Tuesday.
• As cable-TV subscribers disappear in droves, Charter and bigger rival Comcast Corp. are increasingly focusing on growing their internet businesses, selling faster speeds as well as wireless service. Last week, Comcast said it added 260,000 broadband subscribers — its best second quarter in a decade.
• For cable companies, selling TV service comes with several costs built in, including payouts to channel owners for the rights to carry their networks in a package. Selling high-speed internet, on the other hand, has less overhead after the costs associated with building the network.
• In the quarter, Charter’s video losses came entirely from basic-cable customers, who bring in less revenue than fatter bundles with more channels.

(Bloomberg) High-Grade Landscape Improves as July Volume Falls to 5-Year Low  

• The slowest July by primary volume in the last half-decade helped buoy a high-grade credit market that was sorely in need of a pick-me-up. While volume was a a statistical blip, the broader impact on the market was wide reaching.
  • A combination of new issue fatigue, issuers entering self-imposed earnings blackout periods and cyclical summer slowdown translated into disappointing July volume for non-EM, non-SSA, IG totaling just $57.48b vs $122.48b in 2017, a decrease of 53% YoY

• • However, stronger technicals, shrinking dealer balance sheets and positive earnings announcements re-established a robust investment-grade credit market
  • For issuers who proceeded with funding plans, primary metrics illustrate the strengthening backdrop
    • Borrowers paid a meager 2.3bps to bring new deals this month vs the ~5bps new issue concession observed this year
    • Spread compression from IPT to pricing averaged 15.7bps vs 14bps YTD.
    • Orderbook oversubscription rates came in at 2.9 times deal size in-line with the 2.8 YTD average
  • Execution metrics were even stronger during the last two weeks of July
    • Average NICs were flat, orderbooks 3.9 times covered and deal spreads tightened 18bps across execution
  • In the end, funding conditions in July improved to levels not seen since early February when credit spreads, at the tightest level in over a decade, coincided with an ultra-low Treasury yield environment. The reanimation was a lifeline to a struggling credit market that had started the month with spreads widening to YTD highs and issuance costs rising to double-digit concessions on a deluge of supply in late June

(Bloomberg) Credit-Card Backlash Mounts as Kroger Weighs Expanding Visa Ban

• Kroger Co. is considering expanding a ban on Visa Inc. credit cards imposed by one of its subsidiaries, in the latest signal that retailers are preparing a fresh battle over the $90 billion they pay in swipe fees every year.
• Shares of payment companies including Visa, American Express Co. andMastercard Inc. dropped on Monday. Merchants have long looked for ways to cut such charges, including by lobbying lawmakers for lower rates and through technology upgrades that avoid traditional card payments entirely.
• The largest U.S. supermarket chain, Kroger said its Foods Co. Supermarkets unit in California will stop accepting Visa cards at 21 stores and five fuel centers next month. Kroger spokesman Chris Hjelm said in an interview that the parent company might follow the lead.
• “It’s pretty clear we need to move down this path, and if we have to expand that beyond Foods Co., we’re prepared to take that step,” Hjelm said. When the amount retailers pay in card fees “gets out of alignment, as we believe it is now, we don’t believe we have a choice but to use whatever mechanism possible to get it back in alignment.”
• Kroger’s announcement followed Walmart Inc.’s decision last week to abandon Synchrony Financial after the two couldn’t agree to economic terms. And Amazon.com Inc.’s foray into financial services has also been seen as a way the retailer could save $250 million.

CAM Investment Grade Weekly
07/27/2018

Corporate spreads rallied this week and the corporate index is 6 basis points tighter on the week as we go to print on Friday morning. The tone of the market remains firm this morning.

According to Wells Fargo, IG fund flows for the week of July 19-July 25 were +$1.2 billion. IG flows are now +$77.248 billion YTD.

Per Bloomberg, $9.20 billion of new issuance printed during the week with no deals pending on Friday morning. This was lighter than consensus estimates, which had called for issuance of around $20bln.  Earnings blackout most likely played a role in abated issuance.  Bloomberg’s tally of YTD total issuance stands at $691.984bn.

Treasury rates opened higher on Monday but then remained unchanged throughout the week. All told, we are 6bps higher today on 10yrs relative to last Friday’s close.

(WSJ) Prolonged Slump in Bond Liquidity Rattles Markets

• Many bonds around the globe are becoming harder to trade, prompting some investors to shift to other markets and raising concerns about a broad decline in liquidity.
• The median gap between the price at which traders offer to buy and sell, a proxy for the ability to move in and out of markets quickly, has widened this year across European corporate debt and emerging-market government and corporate bonds, according to data from trading platform MarketAxess. Trading in some derivatives has picked up as traders pull back from bond markets they view as increasingly unruly and expensive.

• In May, Italian two-year government-bond yields notched their biggest one-day jump since at least 1989. The surge was triggered by Italian politics, but a lack of liquidity appeared to amplify the moves as the gap between the price at which traders were willing to buy and where they were willing to sell surged to above half a percentage point, according to Thomson Reuters data.
• Alberto Gallo, who runs more than $1 billion in Algebris Investments’ Macro Credit strategy, said it took “around 10 times longer” to unwind a bet on Italian bonds than normal and that it was hard to get bids or offers on trades of more than $10 million in size.
• Liquidity “was bad and it’s remained relatively bad” since May, he said.
• Meanwhile, parts of global bond markets have always had patches of illiquid trading, particularly during bouts of financial-market turbulence.
• But investors say that it is getting worse even in these areas, particularly in emerging markets.
• For dollar-denominated government debt in emerging Europe, the Middle East and Africa, the median bid-ask spread has risen roughly 75% this year to around 22 cents, according to MarketAxess.
• The much larger presence of triple-B-rated debt in the market—the lowest-rated securities still considered investment grade—means that liquidity may be lower than it currently appears given investors may shun riskier securities during times of market stress, according to Gerard Fitzpatrick, Russell Investments’ EMEA chief investment officer.
• “We’ve done some scenario testing there and we think it’s a concern,” Mr. Fitzpatrick said.

Corporate spreads are modestly tighter on the week.

According to Wells Fargo, IG fund flows for the week of July 12-July 18 were +$2.5 billion. IG flows are now +$76.072 billion YTD.

Per Bloomberg, $31.380 billion of new issuance priced through Friday morning. Banks led the way this week, as they issued $20bln+ in new supply coincident with earnings releases.  Bloomberg’s tally of YTD total issuance stands at $682.784bn.

Treasury rates did not change materially this week while curves have added a touch of steepness off the lows.

(Bloomberg) Here’s Exactly What PG&E Wants California to Do About Fires

• Virtually everyone who’s been following the multibillion-dollar problem that California’s power companies are facing in the wake of last year’s devastating wildfire season knows that the biggest among them — PG&E Corp. — is lobbying the state hard to change its wildfire policies.
• And California lawmakers seem receptive: Governor Jerry Brown formed a committee this month to consider changes to regulations that hold utilities liable for the costs of wildfires that their equipment ignite — even if they weren’t negligent. In a telephone interview Thursday, PG&E’s senior vice president of strategy and policy, Steve Malnight, laid out exactly what the company’s lobbying Sacramento for. Here’s the utility’s wish list:
  • A change in the way the state applies its so-called inverse condemnation law — the one that holds utilities strictly liable for fire damages regardless of negligence. PG&E thinks it should take into account whether a company acted in a “reasonable way.” Malnight said that’s how local flood control districts are treated today when the state considers flood damage liabilities. “We think that’s a fair standard,” he said.
  • A bill that would allow PG&E to issue bonds backed by customer bills that would help pay for costs tied to the deadly Wine Country wildfires last year. (California investigators have already determined that PG&E’s equipment caused several of the blazes.) The legislation wouldn’t shield the utility from costs associated with potential negligence, Malnight said. He estimated that a bond issuance would save PG&E’s customers about a third of the costs of covering damages compared with traditional financing means, such as issuing equity.
  • More “comprehensive solutions” to preventing future wildfires. Malnight said the company supports state regulations that go beyond liability rules and speak to the resiliency of infrastructure. He said the committee that Brown formed has already called for the need for broader solutions including forest management.
• Malnight said PG&E has been building a “broad-based” coalition of investor-owned and publicly owned utilities and labor unions to push for reforms.

(Bloomberg) Microsoft Floats to Record Highs as Wall Street Cheers the Cloud        

• Microsoft Corp.’s foray into cloud technologies is paying off after revenue for the fiscal fourth quarter bested the highest of analysts’ estimates.
• Thanks to the growing adoption of Microsoft’s cloud offering, Wall Street is rewarding the Redmond, Washington-based software provider with buy reiterations and price target increases. Goldman Sachs, while boosting its price target to $125 from $114, said the company’s bring-your-own-licence program is “starting to bear fruit.”
• Chief Executive Officer Satya Nadella has been overseeing steady growth in the company’s Azure and Office 365 cloud businesses. Surveys of customer chief information officers by both Morgan Stanley and Sanford C. Bernstein published in the past month show an increase in companies signing up for or planning to use Microsoft’s cloud products. Revenue from cloud-computing platform Azure rose 89 percent in the quarter, while sales of web-based Office 365 software to businesses climbed 38 percent. Microsoft also saw a bump from relative improvements in the corporate personal-computer market, which has been stagnant for years.

(Bloomberg) Comcast Drops Out of Bidding War for Fox to Focus on Sky

• Comcast Corp. will no longer seek to compete with Walt Disney Co.’s for a swath of 21st Century Fox Inc.’s entertainment assets, choosing to focus instead on winning control of the British pay-TV service Sky Plc.
• Following a bidding war with Disney, Comcast concluded that the price for the Fox assets was too high, according to a person familiar with the matter who asked not to be identified because the decision process was private. Another hurdle was the regulatory requirement to divest Fox’s regional sports networks as part of any deal, the person said.
• Disney can now go ahead with its offer of $71.3 billion for Fox’s properties, which include a 39 percent stake in Sky. Comcast has offered about $34 billion for the U.K. pay-TV provider, including Fox’s stake, though it’s unclear if Disney will be willing to part with it.
  • Comcast bondholders may be relieved if the company abandons its debt-fueled pursuit of Fox’s entertainment assets and limits its M&A activities to the Sky deal. If Comcast were to successfully acquire both Fox and Sky, its debt load would likely increase to the $170 billion range, net leverage would rise to the mid-4x area and its ratings could fall two notches to mid-triple B. In anticipation of such a scenario, Comcast and Fox bonds have been among the worst performers within the communications sector so far this year. Conversely, their bond spreads could narrow if Comcast retains its A3/A- ratings and Fox bonds are assumed by Disney.

Corporate spreads have moved tighter throughout the week.  Generically, most credits are 2-4 basis points tighter on the week while the corporate index is 3 basis points tighter week over week as of Friday morning.

According to Wells Fargo, IG fund flows for the week of July 5-June 11 were +$3.4 billion.  IG flows are now +$71.912 billion YTD.

Per Bloomberg, $11.4 billion of new issuance priced through Friday morning.  A slow week of issuance is unsurprising given that earnings season has begun, which precludes issuance due to blackout periods.  Bloomberg’s tally of YTD total issuance stands at $651.404bn.

Treasury rates did not change materially this week and curves remain near their flattest levels of the year.

(Bloomberg) AT&T Appeal Seen as High-Stakes Shot at Redemption for Enforcers

• The Trump administration’s renewed battle against AT&T Inc.’s Time Warner Inc. deal signals that it still sees a path to undoing the blockbuster merger — even after a stinging rebuke of its case last month.
• Rather than walk away, the Justice Department’s antitrust division took a big gamble Thursday, with a one-sentence notice of appeal filed in federal court in Washington. In doing so, it risks a second defeat that could lead to binding precedent that makes future merger challenges harder.
• But the move offers a tempting shot at redemption after a humiliating loss handed down by U.S. District Judge Richard Leon. The case will be heard by the U.S. Court of Appeals for the District of Columbia Circuit, where President Donald Trump’s recent Supreme Court nominee Brett Kavanaugh sits.
• “Their assessment of the strategic risks may be bad, may be unduly risky — a lot of people said that about this case in the first place,” said Chris Sagers, an antitrust law professor at Cleveland State University. “So far that has all proven true and maybe it will prove true that appealing this decision was also unwise.”
• In last month’s 172-page opinion, Leon ripped apart the government’s case that the $85 billion deal would give AT&T the power to hike prices. The Justice Department argued that the telecom giant would charge its cable-TV competitors more money for Time Warner shows, bringing higher bills to consumers across the country.
• To some observers, the judge’s decision smacked at times of anti-government bias — particularly when Leon admonished Justice Department lawyers not to bother seeking a temporary order halting the merger from proceeding. Obtaining a stay, which the government had a right to seek, “would undermine the faith in our system of justice,” Leon wrote.
• “The judge’s ruling showed an extreme favoritism for AT&T’s arguments and appeared to substantially discount everything the government presented,” said Gene Kimmelman, the head of Public Knowledge, a Washington-based public policy group that opposed the merger. “I’m not surprised the government views it as a totally incorrect ruling.”
• AT&T closed the Time Warner transaction on June 14, two days after Leon’s ruling. The Justice Department had agreed not to seek an emergency court order preventing the deal from closing after AT&T promised to operate Time Warner’s Turner Broadcasting as a separate business unit until 2019. That would make it easier for AT&T to sell Turner if the government ultimately prevails.

 (Bloomberg) NAFTA Repeal Would Be ‘Disaster’ for U.S.: Union Pacific CEO         

• Repealing the North American Free Trade Agreement would be a “disaster” for the U.S. economy, says Union Pacific CEO Lance Fritz.
  • Growing list of tariffs from President Trump’s trade policies threatens “to undo progress” made in economy in recent years, Fritz says at the National Press Club in Washington
  • Administration should address China’s impact and modernize NAFTA, but other trade proposals “look as if they’ll do more harm than good”: Fritz
  • To change China’s behavior, “we need to work with our allies, not start trade wars,” he says
    • “The best thing we can do for American workers is to create new jobs, and the best way to create new jobs is trade”
  • Uncertainty over trade is discouraging capital expenditure, he says
    • It costs $3m to build a mile of railroad track; costs $3.25m with steel tariffs, he says
      

(Bloomberg) U.K. Takeover Panel Sets Sky Floor Price in Disney-Comcast Fight

• The body that oversees U.K. takeovers raised the minimum price that Walt Disney Co. must pay for British pay-TV company Sky Plc as Disney battles Comcast Corp. for control of Rupert Murdoch’s media empire.
• Disney would have to bid for all of Sky at 14 pounds ($18.37) a share if it manages to acquire the entertainment assets of Murdoch’s 21st Century Fox Inc. before a bidding war for Sky between Fox and Comcast concludes, the Takeover Panel said in a statement.
• The panel’s decision is unlikely to affect the outcome of the contest as the floor price is in line with Fox’s current bid for Sky and below the 14.75 pounds a share offer from Comcast.
• Disney and Comcast are vying for Fox assets including a 39 percent stake in Sky. The Takeover Panel can uphold the interests of other Sky shareholders by forcing Disney and Comcast to buy them out at a minimum price. That price is calculated by examining the bids for the Fox assets and ascribing an implied valuation to the Sky stake. The Panel’s so-called chain principle mandates a full takeover bid for a company if a buyer acquires more than 30 percent of its shares, even if those shares are acquired as part of a larger deal.
• The panel had previously ruled, following Disney’s initial $52.4 billion bid for Fox, that a Disney offer for Sky would be required at 10.75 pounds a share. Disney has since increased its offer for the Fox bundle by 35 percent.
• Sky is seeking to review the latest ruling, the panel said in the statement, without giving details of Sky’s concerns. “Each of Disney and Fox is considering its position,” it added.

Corporate spreads moved modestly wider during the week as BBB credit continues to underperform A-rated credit.

According to Wells Fargo, IG fund flows for the week of June 21-June 27 were +$1.3 billion.  IG flows are now +$69.387 billion YTD.

Per Bloomberg, it was the slowest week for the new issue calendar thus far in 2018, with only $2.4 billion in new corporate debt priced through Thursday.  This brings the YTD total to ~$595bn.

Treasury rates did not change materially this week and curves remain flat.

(Bloomberg) Fed Test Slaps Wall Street Titans, Unleashes Record Payout

• Tougher Federal Reserve stress tests forced some of Wall Street’s top banks to rein in ambitious plans for pumping out cash to shareholders. But even those diminished returns spell a record payout to investors.
• As the central bank’s annual stress tests ended Thursday, the nation’s four largest lenders — JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. — said they will distribute more than $110 billion through dividends and stock buybacks, sending their stocks higher. Even shares of Goldman Sachs Group Inc. and Morgan Stanley — which the Fed blocked from boosting total payouts — climbed in early trading Friday.
• The Fed’s decisions in the test provided some relief for investors after arecord 13 straight days of declines in the S&P 500 Financials Index. In the hours after clearing the test, more than 20 firms described how they’ll reward their owners over the coming four quarters. Wells Fargo plans to boost payouts more than 70 percent to about $33 billion, while JPMorgan signaled a 16 percent increase to $32 billion.
• The Fed also delivered some bad news. The regulator said it rejected initial proposals from six firms — JPMorgan, Goldman, Morgan Stanley, American Express Co., M&T Bank Corp. and KeyCorp — to make even higher payouts, forcing them to temper their requests. Never have so many firms taken that so-called mulligan to finish the exam.
• The Fed also failed a U.S. subsidiary of Deutsche Bank AG, citing “widespread and critical deficiencies” in its planning. The widely anticipated rejection limits the unit’s ability to send capital home to Germany and comes as senior executives try to bolster investor confidence. The Frankfurt-based firm said it’s working with regulators and making progress.

 (Bloomberg) Charter Pays Double-Digit Concession                     

• Domestic telecom company Charter Communications was the lone issuer to navigate what’s become a treacherous investment-grade primary market.
  • Compressing spreads 15bps, CHTR paid 10bps in new issue concession to print $1.5 billion split between 5.5-year fixed- and floating-rate notes when taking into account both their outstanding 22s and 25s.
  • New issue fatigue continues to grip the market as investors digest more than $31 billion in jumbo acquisition-related financing from Bayer and Walmart alone. After considering persistent headline risk from global trade tensions, sensitivities around Italy and an upcoming holiday-shortened week, activity is likely to remain muted until the week beginning July 9.
  • With just $2.4 billion pricing, we are on pace for the lightest volume week of the year. Prior to this, the last week of May held that distinction with $4.75 billion of sales.
  • It was surprising that a split-rated, high-beta telecommunications company elected to move forward today given the recent uneven broader market backdrop and weaker credit landscape.
  • Execution can best be described as mixed this week, highlighted by triple-B captive finance issuer Penske Truck Leasing’s 5-year deal stalling Tuesday, launching at initial price thoughts while the borrower was forced to pay elevated concessions.
  • As we saw over the last two active sessions, today’s final orderbook was less than 2 times covered.

(Bloomberg) In GE Overhaul, Once-Mighty Finance Arm Goes Out With a Whimper

• General Electric Co.’s finance business was once considered “too big to fail’’ by the U.S. government. These days, John Flannery is trying to make it too small to notice.
• The chief executive officer is selling the bulk of what’s left of GE Capital as part of an effort to remake the parent company into a less volatile — and much smaller — maker of aerospace and power equipment.
• When he’s done, the lending side, which GE has been downsizing since the financial crisis, will consist of a world-class aircraft leasing unit and not much else. It wasn’t that long ago that it offered everything from credit cards and commercial real estate loans to freight-train financing and pet insurance.
• Flannery’s plan, which also calls for spinning off the health-care division and backing out of the oil and gas market, would effectively complete the slow-motion breakup of a banking business that predecessors Jack Welchand Jeffrey Immelt had built into a Wall Street titan.
• Flannery, who spent decades in finance roles at GE, acknowledged the diminishing role of lending at the company but wouldn’t call it the end of GE Capital. After all, there’s still one big business left.
• GE Capital Aviation Services, better known as Gecas, is one of the world’s top plane lessors, with a fleet of almost 2,000 aircraft. The business generated $283 million in profit in the first quarter, while GE Capital overall lost $1.8 billion.
• Flannery has no plans to sell Gecas, which he argues is complementary to GE’s jet-engine manufacturing operations. Still, he said there’s a lot of external interest, giving GE “optionality” down the road. As he put it, potential acquirers “call us constantly.”

Trade concerns continued to weigh on debt and equity markets throughout the week. Spreads on the Bloomberg Barclays Corporate Index are 7 wider on the week as we go to print on Monday.  A deluge of corporate bond supply in the primary market has certainly helped to push spreads wider.  On Monday, Bayer printed a $15bln deal to fund its acquisition of Monsanto.  At the time, this was the second largest deal of the year, after the jumbo $40bln deal that CVS brought to market in early March.  Walmart would soon take the mantle of the second largest deal from Bayer as the retailer brought a $16bn deal on Wednesday to fund its acquisition of Indian-based ecommerce retailer Flipkart.

According to Wells Fargo, IG fund flows for the week of June 14-June 20 were -$1.4 billion. Even with the reversal in flows, IG flows are still positive at +$68.107 billion YTD.

Jumbo M&A led to one of the busiest new issue calendars that we have seen thus far in 2018. Per Bloomberg, over $43 billion in new corporate debt priced through Thursday.  This brings the YTD total to $636 billion.

(Bloomberg) Why Corporate Bond Liquidity Might Not Be as Bad as You Fear

• Banks’ shrinking corporate-bond holdings are partly a statistical mirage, according to a consulting firm. Some money managers and analysts believe it may be time to stop worrying about it.
• One measure of total dealer holdings of corporate bonds has dropped by around 90 percent since the crisis, a fact that has instilled fear in money managers for years. Dealers’ inventories of corporate bonds can be a shock absorber for the market: in times of trouble, banks can buy the securities from panicked sellers, hang onto them, and then offload them slowly, potentially preventing prices from plunging.
• But the decline in inventories is less dramatic than it seems because of a quirk in the data, consulting firm Tabb Group wrote in a recent report. The Federal Reserve Bank of New York statistic in question, primary dealer positions in corporate securities, fell to around $23 billion as of June 6 from around $265 billion in 2007. Much of that decline stemmed from the New York Fed narrowing the way it defined corporate bonds in 2013, when it appeared to have removed mortgage-backed securities without government backing from the mix, according to Tabb. On an apples-to-apples basis, inventories declined more like 35 percent to 50 percent for banks between 2007 and 2014, the consulting firm estimated.
• Inventories aren’t even the best measure to look at for assessing liquidity, Tabb Group said. What money managers care about is a bank’s capacity to buy securities, and the bigger a dealer’s inventory, the less ability it has to buy more. The average capacity at the six biggest U.S. banks for corporate bond underwriting fell just 16 percent between 2006 and 2017, according to Tabb, and most of the banks can take on even more risk if there’s a valid business reason to do so.
• Looking at the top 20 dealers, the decline in banks’ capacity from the pre-crisis era is closer to around 35 percent, Tabb estimates. But it’s not fair to completely blame rulemakers for these declines. There are good business reasons for banks to be less willing to hold the debt because interest rates are broadly rising, said Timothy Doubek, senior portfolio manager at Columbia Threadneedle Investments, which manages about $172 billion of fixed income assets.
• There are still reasons to be worried about how corporate bonds may perform in a downturn. The declines in inventories and capacity have come at a time when the amount of debt outstanding has surged: there were about $9 trillion of U.S. corporate bonds outstanding as of the end of March, according to the Securities Industry and Financial Markets Association, a trade group. That’s an increase of around 85 percent from the end of 2006.
• There’s no single way to define liquidity and it can vanish during times of stress. One measure known as the “bid-ask spread,” which looks at differences between the prices at which dealers will buy and sell a security, tends to grow wider when liquidity is low, and shrink when it’s strong. That spread is about as tight as it’s ever been.

There was no shortage of news in the market this week with political, economic and monetary policy events.  To top it off, on Friday morning we learned that the U.S. and China are now officially in the early innings of a potential trade war, which has pushed the debt and equity markets firmly into risk-off mode as we head to press.

According to Wells Fargo, IG fund flows for the week of June 7-May 13 were +$2.3 billion.  IG flows are now +$68.573 billion YTD.  Short and intermediate duration funds continue to garner assets while long duration funds have been shrinking this year.

Per Bloomberg, 23.37 billion in new corporate debt priced through Thursday.  This brings the YTD total to ~$592bn, which is down 8% year over year.

Treasury curves continue to flatten and are now the flattest they have been since 2007.

(CNET) Net neutrality is really, officially dead. Now what?

• The Obama-era net neutrality rules, passed in 2015, are defunct. This time it’s for real.
• Though some minor elements of the proposal by the Republican-led FCC to roll back those net neutrality rules went into effect last month, most aspects still required approval from the Office of Management and Budget. That’s now been taken care of, with the Federal Communications Commission declaring June 11 as the date the proposal takes effect.
• While many people agree with the basic principles of net neutrality, the specific rules enforcing the idea has been a lightning rod for controversy. That’s because to get the rules to hold up in court, an earlier, Democrat-led FCC had reclassified broadband networks so that they fell under the same strict regulations that govern telephone networks.
• FCC Chairman Ajit Pai has called the Obama-era rules “heavy-handed” and “a mistake,” and he’s argued that they deterred innovation and depressed investment in building and expanding broadband networks. To set things right, he says, he’s taking the FCC back to a “light touch” approach to regulation, a move that Republicans and internet service providers have applauded.
  • What’s net neutrality again?
    • Net neutrality is the principle that all traffic on the internet should be treated equally, regardless of whether you’re checking Facebook, posting pictures to Instagram or streaming movies from Netflix or Amazon. It also means companies like AT&T, which is trying to buy Time Warner, or Comcast, which owns NBC Universal, can’t favor their own content over a competitor’s.
  • So what’s happening?
    • The FCC, led by Ajit Pai, voted on Dec. 14 to repeal the 2015 net neutrality regulations, which prohibited broadband providers from blocking or slowing down traffic and banned them from offering so-called fast lanes to companies willing to pay extra to reach consumers more quickly than competitors.
  • Does this mean no one will be policing the internet?
    • The FTC will be the new cop on the beat. It can take action against companies that violate contracts with consumers or that participate in anticompetitive and fraudulent activity.
  • So what’s the big deal? Is the FTC equipped to make sure broadband companies don’t harm consumers?
    • The FTC already oversees consumer protection and competition for the whole economy. But this also means the agency is swamped. And because the FTC isn’t focused exclusively on the telecommunications sector, it’s unlikely the agency can deliver the same kind of scrutiny the FCC would.
  • What about internet fast lanes? Will broadband providers be able to prioritize traffic?
    • The repeal of FCC net neutrality regulations removes the ban that keeps a service provider from charging an internet service, like Netflix or YouTube, a fee for delivering its service faster to customers than competitors can. Net neutrality supporters argue that this especially hurts startups, which can’t afford such fees.

(Bloomberg) AT&T Closes Time Warner Deal After U.S. Declines to Seek Stay

• AT&T Inc. closed its $85 billion takeover of Time Warner Inc., the culmination of a 20-month battle for the right to enter the media business by acquiring the owner of HBO and Warner Bros.
• The completion of the deal came just hours after AT&T made a filing in federal court in Washington disclosing that it had reached an agreement with the Justice Department that waived a waiting period for closing.
• The agreement doesn’t prevent the department’s antitrust division from appealing the decision issued Tuesday by a federal judge rejecting the U.S. antitrust lawsuit against the deal. The government is still weighing whether to appeal the ruling, a Justice Department official said.
• AT&T’s completion of the takeover caps a nearly two-year effort to acquire Time Warner, the owner of CNN, HBO and Warner Brothers studio. The Justice Department sued in November to stop the merger, claiming the combination would raise prices for pay-TV subscribers across the country. After a six-week trial, U.S. District Judge Richard Leon ruled against the government’s case.

(Bloomberg) Powell Lauds Economy as Fed Nudges Up Interest-Rate Hike Path

• Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected.
• The so-called “dot plot” released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. The number viewing three or fewer hikes as appropriate fell to seven from eight. The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.
• Chairman Jerome Powell told reporters following the decision — which lifted the Fed’s benchmark rate by a quarter percentage point to a range of 1.75 percent to 2 percent — that the main takeaway was that “the economy is doing very well.” Powell also announced he plans to start holding a press conference after every meeting in January, cautioning that “having twice as many press conference does not signal anything.” The Fed chief currently speaks to reporters after every other meeting of policy makers.

(Bloomberg) Concho Resources Rides IG Upgrade Bump Again

• Exploration & production company Concho Resources was among Thursday’s top performers, pricing $1.6 billion across 2 tranches to help fund the RSP Permian acquisition. The issuer rode the momentum of its Moody’s ratings hike from HY to IG Monday pricing flat to its outstanding credit curve.
• CXO last accessed the debt capital markets in September pricing a whopping 25bps inside its curve after amassing more than $11 billion in orders. That deal came on the heels of an S&P upgrade to investment grade from HY.

(WSJ) Disney, Comcast Bids for Fox Assets Could Face Regulatory Sticking Point: Sports

• Comcast Corp. CMCSA and Walt Disney Co. DIS -0.54% are fighting to win over 21st Century Fox Inc. FOX shareholders and acquire major assets of Rupert Murdoch’s media empire. After the boardroom fight comes the next battle: winning over Washington.
• Both bids are expected to get a close look from antitrust regulators at the Justice Department, which earlier this week suffered a bruising loss when a judge approved AT&T Inc.’s acquisition of Time Warner Inc. with no conditions.
• The Justice Department’s antitrust chief said Wednesday he wouldn’t let the outcome deter him from challenging other deals. “I don’t think our case or evidence or theories were flawed,” Makan Delrahim said, adding that “a different judge could have ruled completely differently.”
• Comcast executives have begun reaching out to Fox and Comcast shareholders to make their case for the merger, people familiar with the matter say.
• Because Disney and Comcast, like Fox, produce television shows and movies, either deal would represent a horizontal merger, in which direct rivals combine, further limiting the number of competitors in the industry.
• The sports assets that would be combined in either a Disney-Fox or Comcast-Fox deal will get heavy scrutiny. Fox is selling nearly two-dozen regional sports networks including in New York, Los Angeles and Detroit. Its marquee property is the YES Network, the television home of the New York Yankees. Fox’s regional sports networks have been valued at $23 billion by industry analysts.
• Comcast’s nine regional sports networks carry local teams in major markets such as Philadelphia and Chicago. Its SNY, the home of the New York Mets, competes for advertisers with Fox’s YES. The addition of Fox’s channels would make Comcast the home for local sports in just about every major television market. That could potentially give it leverage in negotiations with other distributors for the rights to carry those channels. However, the channels for the most part don’t compete against one another.
• Disney doesn’t operate any local sports channels, but it owns ESPN, which has several national channels and rights to just about every major sport. The addition of Fox’s 22 regional channels could give it tremendous clout both locally and nationally with pay-TV distributors, sports leagues and advertisers.
• Neither proposed deal includes the Fox Broadcasting network, its local TV stations, the Fox News and Fox Business channels or the national sports channel Fox Sports 1. The broadcast businesses in particular would have likely made either deal virtually impossible to get past regulators because Disney owns ABC and Comcast owns NBC.

(WSJ) PG&E Cut To BBB By S&P; Still May Be Cut Further

• S&P said the cut reflects the incremental weakening of the business and financial risk profile after CAL FIRE’s determination that PG&E’s equipment was involved with 16 of the Northern California wildfires in late 2017.
• S&P said it could resolve the negative CreditWatch in the near term when CAL FIRE determines the cause of the Tubbs fire, or if there is a legislative solution to inverse condemnation that materializes in the legislative session ending August 2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of May 10-May 16 accelerated from prior weeks, with a positive inflow of $3.5 billion.  Short duration funds have registered 80% of all inflows over the past four weeks, according to Wells.  IG funds have garnered $65.764 billion in net inflows YTD.

Per Bloomberg, over $30bn in new corporate debt priced for the second straight week.  This brings the YTD total to $509bn.  The pace of new issuance is off 2% relative to this point in 2017.

(WSJ) The Era of Low Mortgage Rates Is Over

• Mortgage rates this week jumped to their highest level since 2011, signaling a shift from a period of ultracheap loans to a higher-rate environment that could slow home price appreciation and squeeze first-time buyers.
• The average rate for a 30-year fixed-rate mortgage rose to 4.61% this week from 4.55% last week, according to data released Thursday by mortgage-finance giant Freddie Mac.
• The concern among economists is that higher rates will prompt homeowners to keep their low-rate mortgages rather than trade up for better properties. As rates approach 5%, the risk of the phenomenon known as rate lock grows, economists said.
• A one percentage point increase in rates can lead to a reduction in home sales of 7% to 8%, according to Lawrence Yun, chief economist at the National Association of Realtors. The recent increases in home prices and mortgage rates could especially hurt first-time and moderate-income borrowers, economists said.
• The Mortgage Bankers Association expects refinancings to decline 26% this year, after plunging 40% last year.

(WSJ) What Do Tesla, Apple and SoftBank Have in Common? They’re All Hot for Lithium

• Tesla Inc. and a large Chinese firm each struck deals with lithium producers, the latest sign that big users are rushing to secure supplies of the material used in electric-car and cellphone batteries.
• Both lithium and cobalt, which is also used in these batteries, face potential shortages in the years ahead as electric-vehicle use increases.
• That concern is driving a number of companies like technology firms and car makers reliant on lithium and cobalt to strike deals now, even if it means joining with suppliers that haven’t started producing yet.
• In addition to the sector’s dominant players such as Glencore PLC and Albemarle Corp. , analysts estimate there are more than 100 smaller lithium miners and about 25 cobalt firms. Many are publicly traded in Canada and Australia, and some have already clinched deals with big users. “It just looks like we’re on the precipice of this wave,” said Chris Berry, founder of House Mountain Partners LLC, a New York-based adviser to battery-metals companies and investors. “You’re going to need a lot of investment in a hurry to meet demand.”
• But the rush to lock in deals could turn out to be a speculative bust. Prices of lithium and cobalt more than doubled from 2016 through last year, but the rally has cooled off recently amid worries about oversupply. Some investors also think manufacturers will replace pricey materials like lithium and cobalt using different types of batteries with a higher concentration of cheaper metals such as nickel.
• Analysts expect demand for the materials used to power electric vehicles and smartphones to more than double by 2025, pushing transportation and technology companies into exploring unconventional deals to meet that pressing need.
• Many lithium and cobalt mines are located in regions that have historically been unstable: Congo in the case of cobalt, and South America for lithium, adding to worries about a supply shortage.

(Bloomberg) U.S. Retail Sales Gain Points to Healthier Second Quarter

• S. retail sales rose in broad fashion last month as bigger after-tax paychecks helped compensate for rising fuel costs, signaling consumer demand was off to a firm start this quarter.
• The value of sales increased 0.3 percent in April, matching the median forecast, after a 0.8 percent advance in the prior month that was stronger than initially reported, Commerce Department figures showed Tuesday.
• So-called retail-control group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations, improved 0.4 percent after an upwardly revised 0.5 percent gain.
• The results add to the expectation that consumer spending, the biggest part of the economy, will rebound from its first-quarter weak patch. A strong job market and higher take-home pay in wake of tax reductions are buoying Americans’ wherewithal to spend and cushioning the squeeze from costlier fuel that leaves people with less money to buy other goods and services.
• Nine of 13 major retail categories showed advances in April, led by the biggest jump in sales at apparel stores since March of last year. Increased receipts were also evident at furniture merchants, building-materials outlets, Internet retailers and department stores.
• While consumer spending has remained solid in this expansion, business investment has also been posting strong growth in recent quarters. Tax cuts that President Donald Trump signed into law at the end of 2017 were seen as providing a further jolt to consumption and capital spending that would spur growth toward the president’s 3 percent goal.
• Economists including those at Bank of America Corp. and JPMorgan Chase & Co. have noted the recent runup in gasoline prices, and said persistently higher fuel costs this year would risk eroding a sizeable portion of the tax benefits.

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of May 3-May 9 were positive, with an inflow of $912 million.  According to data analyzed by Wells Fargo, IG funds have garnered $60.031 billion in net inflows YTD.

According to Bloomberg, $44.039bn in new corporate debt priced during the week.  This brings the YTD total to $478.934bn.  Per Bloomberg, this has been the highest weekly volume total since the week ended March 9, which included the $40 billion 9-part CVS deal to fund the Aetna transaction.

(Bloomberg) U.S. Yield Curve Flattest Since August 2007 as Long Bonds Soar

• The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record bond auction bolstered investor confidence in owning long-dated securities.
• The spread narrowed by more than 4 basis points, the most since February, dropping through a previous intraday low from April to 27.7 basis points. The gap between 2- and 10-year Treasuries also shrank in a bull flattening move.

• Investors and Federal Reserve officials alike have been on guard for the curve flattening toward inversion, which has historically preceded recessions. Yet bond traders are still pricing in more than two additional quarter-point rate hikes by year-end, betting policy makers will stick to their tightening path.

(WSJ) Cord-Cutting Pain Spreads to High-Yield Bond Market

• The consumer stampede to streaming media from traditional broadcasters is claiming an unexpected victim: high-yield bond investors.
• Telecommunications, cable and satellite companies have borrowed hundreds of billions of dollars in junk debt to build networks that would allow them to dominate their markets for decades to come.
• The proliferation of internet-based providers is upending that expectation, forcing investors to question the safety of bonds they bought from companies such as satellite broadcaster Dish Network, cable giant Charter Communications, and landline telecommunications company Frontier Communications.
• Defaults are low right now in telecommunications and media bonds, and some companies that offer broadband and wireless access actually benefit from the move toward streaming media.

(Bloomberg) U.S. Economic Growth Can Withstand the Threat From Rising Prices

• Want ads for truck drivers to haul crude oil in Texas are touting salaries as high as $150,000 a year. Some nurses are getting $25,000 signing bonuses. The U.S. unemployment rate just fell to 3.9 percent, one tick away from its lowest since the 1960s. And on May 8 the Bureau of Labor Statistics reported there are 6.5 million unfilled jobs in the U.S., the most on record. Some employers say they’re feeling the squeeze. “Rising labor costs remain the primary contributing factor to our margin erosion,” Chatham Lodging Trust, a company in West Palm Beach, Fla., that owns more than 130 hotels either by itself or in joint ventures, said on May 1.
• Is the U.S. economy overheating? Yes and no. There are plenty of inflationary bottlenecks, and not only in the labor market. Backlogs of orders are the highest since 2004, according to the Institute for Supply Management. Transportation costs have jumped in part because of driver shortages. Strong U.S. oil and gas production has helped push up the prices of essential inputs such as steel pipe and specialty sands used in fracking.
• On the other hand, the bottlenecks aren’t yet causing high inflation across the economy, which would require the Federal Reserve to speed up its interest rate hikes. The U.S. central bank passed up the opportunity to raise the federal funds rate at its May 1-2 meeting while noting that the rate of inflation has “moved close” to the bank’s 2 percent target. “In my judgment, the Fed is ready to accelerate [rate hikes] if they need to, but they’re not getting ahead, which I think is appropriate,” says Josh Wright, chief economist at ICIMS Inc., which makes software to find and hire talent.
• Some of the factors driving up the U.S. inflation rate—in particular, the jump in crude oil prices to about $70 a barrel from less than $50 a year ago—have external causes and don’t reflect overheating in the domestic economy. Rising commodity prices caused in part by new steel tariffs cost General Motors Co.and Fiat Chrysler Automobiles NV at least $200 million each in the first quarter. Tariffs have also helped drive lumber prices to a record. Other external factors are the high price of imported alumina for aluminum smelters and the weather-related runup in prices of vanilla from Madagascar and cocoa from Ivory Coast and Ghana.
• The U.S. economy performed below capacity for so long that it can be hard for managers to remember how to operate without lots of spare resources. Half of the surveyed members of the National Federation of Independent Business say there are “few or no” qualified workers for job openings. Yet on May 8 the NFIB reported that in April the net percentage of small-business owners who reported improved earnings trends was the highest in the survey’s history. “There is no question that small business is booming,” William Dunkelberg, NFIB’s chief economist, said in a statement. (Big companies are, too: First-quarter earnings for companies in the S&P 500 are expected to be 24 percent higher than a year earlier, Bloomberg calculated on May 9.)
• Sectors with strong pay growth generally confront special circumstances. Those truck drivers being offered as much as $150,000? They’re being hired by oil producers in the Permian Basin who are desperate to get their crude to market. Hospitals, whose median expenditures for contract labor rose 19 percent in the past year, face their own special problems, according to John Morrow, a managing director of Franklin Trust Ratings who analyzes hospitals. People whose skills are in high demand and work under temporary contract rather than salary can take full advantage of shortages for their talents, according to Morrow. “This is a level of skill that requires advanced-level training that involves medicine, technology, and science, and all of those things are costly,” he says.
• An important sign that rising costs remain manageable is that most companies haven’t passed them along to customers. Walmart Inc., the nation’s largest private employer, raised starting wages to $11 an hour in January and announced annual bonuses of as much as $1,000. But it’s cutting prices to remain competitive with Amazon.com Inc. and low-cost supermarket chains Aldi Inc. and Lidl US LLC. The same goes for packaged-goods companies. General Mills Inc. has acknowledged that attempts to hike prices for its Progresso soup and Yoplait yogurt ultimately hurt sales by driving shoppers to other brands. In freight transportation, BNSF Railway Co. has picked up market share from Union Pacific Corp. by underpricing it.
• “We have to be a little bit cautious in inferring that wage growth is going to be a major constraint for business,” says Gregory Daco, head of U.S. macroeconomics for Oxford Economics Ltd. While some economists warn that rising inflation is a “late-cycle” phenomenon—i.e., a precursor of recession—“we don’t have clear evidence that we’re at the end rather than the middle of the cycle,” says Michael Englund, chief economist of Action Economics LLC in Boulder, Colo.
• A key statistic to watch is unit labor costs, which are wages adjusted for productivity. They rose at an annual rate of 2.7 percent in the first quarter. But over the past year as a whole, the increase was only 1.1 percent. As long as companies’ unit labor costs don’t rise faster than the prices they charge, tight labor markets won’t be a problem.
• The Fed’s preferred measure of inflation, the price index for personal consumption expenditures, is going to look high for a few months because a brief dip in prices for clothing, hotel rooms, airline fares, and other items has ended, says Ian Shepherdson, chief economist of Pantheon Macroeconomics. That might influence the Fed, he says. There’s a risk that Fed rate setters could react too quickly to signs of overheating. “As inflation climbs, so too will the risk of recession, because at some point policymakers will feel impelled to respond,” Ellen Zentner, chief U.S. economist of Morgan Stanley, wrote in a note to clients on May 2.