Author: Rich Balestra - Portfolio Manager

• US junk bonds tumbled Thursday, posting their worst one-day loss in nearly five weeks after a chorus of Fed officials warned against premature rate cuts. The slide came just as investors braced for a deluge of economic data, with the government reopening after the longest shutdown in US history.
• Yields jumped the most in five weeks to 6.89% and risk premium climbed to 291 basis points. Losses swept across ratings tier, with CCC yields rising 18 basis points to a near three-month high of 10.29%. Spreads widened 15 basis points, the most in five weeks, to 652.
• As Fed officials signaled caution about future rate cuts, the probability of a rate reduction in December dropped below 50%
• Cleveland Fed President Beth Hammack said it’s critical for the US central bank to reach its 2% inflation target even as the labor marker softens. “We’ve got this persistent high inflation that is sticking around,” she warned
• Louis President Alberto Musalem reiterated that officials should move cautiously over further interest rate reductions with inflation running above the central bank’s 2% target
• Minneapolis Fed President Neel Kashkari said anecdotal evidence and the data showed there is an underlying resilience in economic activity
• The selloff snapped a three-day rally and slowed down the primary market. No new borrower launched a debt sale amid the sudden eruption of volatility
• Before the eruption of volatility on Thursday, the market priced nearly $4b in the two sessions of this holiday-shortened week

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds tumbled, posting their steepest one-day loss in three weeks, as the risk premium climbed to 278 basis points after Chair Powell cautioned that a December rate cut is not a foregone conclusion. Yields rose 11 basis points to 6.76%, the biggest one-day jump in three weeks.
• The losses spanned across ratings. CCC yields, the riskiest tier of the high yield market, climbed 14 basis points to 9.84%. Spreads rose 14 basis points to 607 — the biggest one-day widening in three weeks.
• BB yields rose to 5.68% and spreads widened to 168
• The primary market ground to a halt after pricing a modest $4b this week and driving the October tally to about $18b, the slowest month for supply since April

(Bloomberg)  Logan Joins Schmid in Opposing Fed Rate Cut, Citing Inflation

• Two Federal Reserve officials said they did not support the US central bank’s decision to cut interest rates this week, citing inflation that remains too high.
• Dallas Fed President Lorie Logan said she “did not see a need to cut rates this week” in remarks Friday prepared for an event in Dallas. Her comments followed a statement earlier in the day from her Kansas City counterpart, Jeff Schmid, outlining the reasons for his dissent against Wednesday’s rate cut.
• The remarks from Logan and Schmid were the first salvo in what is likely to be an intense debate over the next six weeks before the central bank’s next policy meeting in December, between officials who see a need for more easing to support the labor market and those who are more concerned about inflation.
• “I’d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly,” Logan said.
• Fed officials cut their benchmark rate this week by a quarter percentage point for a second month in a row after a sharp slowdown in hiring over the summer raised concerns about the labor market. Chair Jerome Powell, speaking to reporters Wednesday after the decision, said another cut in December was not a forgone conclusion, noting that some of his colleagues were concerned about inflation.
• That led to a sharp adjustment in the bond market, where investors had been pricing in near certainty of another quarter-point cut in December.
• While Logan doesn’t vote on monetary policy this year, she participates in Federal Open Market Committee discussions and will rotate onto the voting panel in 2026. Two Fed officials voted against the decision at this month’s meeting, with Schmid preferring to hold rates steady and Governor Stephen Miran dissenting for a second straight meeting in favor of a larger, half-point cut.
• “By my assessment, the labor market is largely in balance, the economy shows continued momentum, and inflation remains too high,” Schmid said in his statement.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed for modest weekly gains after yields fell by a mere two basis points in the last four sessions and risk premium by just five basis points. A resurgence of trade tensions with China and a lack of macro data to assess the state of the economy because of the government shutdown have weighed on sentiment.
• The US junk bond rally also lost some momentum as jittery investors pulled $970m from high-yield mutual funds, excluding exchange-traded funds, for the week ended Wednesday, according to Lipper. This is the second straight week of cash outflows from US junk bond mutual funds, excluding ETFs. The two weeks combined resulted in an outflow of $1.73b.
• While the rally lost steam, participants drew comfort from robust corporate earnings and the potential that the Federal Reserve will reduce interest rates at its meeting next week
• After a sudden burst of issuance this summer and a supply boom that made it the busiest September on record, the primary market has slowed, with issuance almost grinding to a halt
• Just three deals for $2.8b were priced so far this week, taking the month’s volume to about $14b, the lightest since April

(Bloomberg)  US CPI Rises Less Than Expected, Keeping Fed on Track to Cut

• Underlying US inflation rose in September at the slowest pace in three months, keeping the Federal Reserve on course to lower interest rates next week.
• The core consumer price index, excluding the often volatile food and energy categories, increased 0.2% from August, according to Bureau of Labor Statistics data out Friday. That was restrained by the smallest increase in a key measure of housing costs since early 2021.
• The September CPI report was initially scheduled to come out on Oct. 15 but was delayed because of the ongoing federal government shutdown. While most BLS operations have ceased since the Oct. 1 closure, the agency recalled staff to prepare this release so the Social Security Administration could tally its annual cost-of-living adjustment.
• The lower-than-expected reading is a welcome surprise, especially for several Fed officials who are leery of cutting rates further. While the central bank was already widely expected to lower borrowing costs at its meeting next week, the report may help convince policymakers that they can do so again in December — especially in the absence of other official reports should the shutdown continue.
• Goods prices, excluding food and energy commodities, rose at a slower pace, dragged down by cheaper prices for used cars. Categories that are more exposed to tariffs, including household furnishings and recreational goods, advanced. Apparel prices climbed at the fastest rate in a year.
• Services prices excluding energy climbed 0.2%, in part reflecting a slower advance in airfares. Shelter prices were tame after rising by the most since the start of the year in the prior month. That included just a 0.1% increase in owners’ equivalent rent — which accounts for roughly a quarter of the overall CPI.
• While the inflationary impact of tariffs has been much less than many economists feared, several forecasters and policymakers are still wary that the duties will continue to put upward pressure on prices — which was evident in some private-sector gauges of inflation in September. President Donald Trump’s latest tariffs, aimed at household goods like kitchen cabinets and upholstered furniture, took effect earlier this month, and retailers like RH have warned of price increases to come.
• Companies across the country have largely reported higher input costs due to tariffs in recent weeks, but the hit to consumers has been uneven, the Fed said in its latest Beige Book survey of regional business contacts. Procter & Gamble Co. is now expecting a more muted impact from tariffs and commodity prices, while O’Reilly Automotive Inc. said they adjusted selling prices to account for the increase in tariff-related costs.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds were broadly resilient as they shrugged off concerns about credit quality after Zions Bancorp disclosed a charge-off for a bad loan at a subsidiary tied to alleged fraud. Junk bond yields held steady and spreads moved in tandem with five-year US Treasury yields even as equities churned on worries about regional banks soon after the First Brands Group collapse.
• While high yield spreads closed at 6.76%, just two basis points higher, leading to a modest loss of 0.3% on Thursday. The high yield market is set for weekly gains, with week-to-date returns at 0.56%, the most since the week ended June 27
• CCC yields were still far below 10%, closing at 9.87%, and spreads closed at 627 basis points
• BB yields barely moved and closed at 5.72%, while spreads closed at 185 basis points. BBs are also headed for a weekly gain, with week-to-date returns at 0.54%
• The markets, while struggling to assess the impact of the US-China trade war and broader credit quality in the wake of the regional bank scare, shifted their attention to widely expected interest-rate cuts after Chair Powell signaled that the Federal Reserve is set to deliver a quarter-point reduction at its meeting later this month. Speculation that the Fed will lower interest-rates twice this year fueled optimism about corporate earnings.
• The primary market is steady and investors are still hungry for new paper.

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.

(Bloomberg)  High Yield Market Highlights

• New bond sales in the US junk bond market soared past $48b this month to make it the busiest September ever, surpassing September 2020’s $47b. Issuers have priced $17.5b so far this week, the busiest week in five years. The last time the market was more active was the $18.3b notched in the week ended Sept. 18, 2020.
• The supply boom has persisted from early summer, bolstered by attractive yields, tight spreads and a relatively resilient economy against the backdrop of easier interest-rate policy.
• Four more borrowers tapped the market on Thursday for $4.5b, while 18 companies sold bonds this week. This has also been the busiest month overall for issuance since April 2021. It’s on track to be among the top five months on record for new issuance.
• The unrelenting supply tide caused pressure on yields and prices on Thursday, slowing the broad rally that began last week. Gains stalled across ratings amid the huge wave of supply.
• Yields jumped 10 basis points, the largest one-day increase in more than three weeks, to 6.72%. Spreads widened to 266 basis points, driving the biggest one-day loss in three weeks
• BB yields climbed eight basis points to 5.73%, a three-week high, prompting a loss of 0.22% on Thursday, the most in three weeks. Spreads closed at 166 basis points. CCC yields advanced 12 basis points to cross the 10% mark and close at 10.09%, a two-week high. That fueled a loss of 0.35%, the largest in eight weeks and the most in the high yield market on Thursday.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bond yields tumble to a new multi-year low and risk premium drops to a seven-month low driving gains for the seventh consecutive week, the longest winning streak since last September. Yields closed at 6.57%, also falling for the seventh week in a row.
• The broad rally extended across ratings in the US junk bond market on renewed bets that easing interest-rate policy by the Federal Reserve will bolster corporate earnings and growth. The gains spanned across all risk assets as equities hit all-time highs. CCC yields, the riskiest tier of the high yield universe, dropped below 10% for the fourth time in three weeks and are near a six-month low at 9.96%. CCCs have risen to the top again with 0.23% returns on Thursday, the best performing asset class in the US high yield market.
• The market expectations of at least two more 25 basis points cut this year and one 25 basis point cut each in 2026 and 2027 are in line with Federal Reserve’s dot plot projections driving risk assets across the board
• BB yields also plunged to a multi-year low of 5.59% and spreads fell to a more than 10-week low spurring gains for the seventh successive week
• Plunging yields, falling risk premium, and a still steady economy against the backdrop of Fed’s easing interest-rate policy, fueled a supply surge as the week is set to close with nearly $12b in new bonds, the busiest since the week ended Aug. 8. Leaving aside the last two weeks of a summer lull, the primary market has seen supply of $9b+ for five straight weeks
• Credit remains unshaken, bolstered by persistent technical strength, Barclays strategists Brad Rogoff and Dominique Toublan wrote on Friday. With the market seemingly rangebound at tight levels, identifying areas of dispersion and catalyst-driven opportunities remains key, they added

(Bloomberg)  Fed Cuts Rates by Quarter-Point; Powell Cites Weakness in Jobs

• Federal Reserve officials lowered their benchmark interest rate by a quarter percentage point and penciled in two more reductions this year following months of intense pressure from the White House to slash borrowing costs.
• Chair Jerome Powell pointed to growing signs of weakness in the labor market to explain why officials decided it was time to cut rates after holding them steady since December amid concerns over tariff-driven inflation.
• “Labor demand has softened, and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant,” Powell told reporters. He added, “I can no longer say” the labor market is “very solid.”
• Powell also signaled ongoing concern over inflation pressures resulting from tariffs. “Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem,” he said.
• Looking ahead at the outlook for additional rate moves, Powell was cautious, saying the Fed was now in a “meeting-by-meeting situation.”
• In their post-meeting statement, policymakers acknowledged that inflation has “moved up and remains somewhat elevated,” but also pointed to worries over jobs. Officials said the unemployment rate had “edged up,” and the “downside risks to employment have risen.”
• The cut was widely expected amid signs the central bank’s concerns are shifting toward employment and away from inflation, following a sharp slowdown in hiring over the last several months.
• Policymakers also updated their economic projections at this meeting and now see two additional quarter-point cuts this year. That’s one more than projected in June. They foresee one quarter-point cut in 2026 and one in 2027.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed for their sixth week of gains, with yields tumbling to a fresh 40-month low of 6.60% and spreads returning to the six-month low of 268 basis points, spurred by expectations of Federal Reserve policy easing. The high yield market notched up gains in three of the last four sessions.
• The rally spanned the risk spectrum and gained momentum after jobless-claims data on Thursday reinforced signs of weak labor market and fueled bets that the Fed will cut rates next week. BB yields, the best of the junk bond market, plunged to near a 40-month low of 5.61% and are on track for a sixth week of declines, the longest streak since December 2023. BBs have returned 0.42% returns so far this week, the most in more than two months.
• Risk assets traded with strong bias as macro data broadly supported expectations of a Fed cut next week, Barclays strategists Brad Rogoff and Dominique Toublan wrote in a note published Thursday
• While technicals remain supportive, valuations are increasingly asymmetric, and the risk of spread widening into 4Q is rising, the wrote
• CCC yields, the riskiest segment of the high yield market, fell below 10%. Spreads tightened 10 basis points on Thursday, the most in two weeks, to 613 basis points
• Single B yields also fell to a fresh 40-month low of 6.53% and spreads closed at 261 basis points prompting gains for the sixth straight week
• Attractive yields, tight spreads, strong demand and expectations of easing interest rates spurred a supply surge in the primary market
• Twelve borrowers sold nearly $9.5b this week so far and this will be the third consecutive week of more than $9b in supply
• September volume stands at $19b

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds have recovered from a rocky start to be on course to post gains for the fifth consecutive week. Yields remain within sight of a 40-month low after dropping eight basis points on Thursday to close at 6.74%. The risk premium fell five basis points to 275, just seven basis points higher than the six-month low of 268.
• The rally spanned across ratings, driving a boom in supply after a busy summer. The primary market priced almost $10b in just three sessions this week, including nearly $5b on Wednesday, the busiest day in three months. The wave of new bond sales continued on Thursday, with the market pricing more than $3b in a reflection of strong demand and robust risk appetite amid expectations of Fed interest-rate cuts.
• The rally gained momentum as equities hit an all-time high. Junk bonds also climbed as the markets fully priced in a rate cut this month after fresh data reinforced the broad consensus that the labor market is cooling. The latest readings show hiring plans fell to the weakest level for any August on record as intended job cuts mounted amid economic uncertainty. Hiring by US companies was less than forecast, in line with other data showing weak labor demand
• The advance in the US high-yield market was powered by CCCs, the riskiest assets. CCCs are set for a fifth week of positive returns
• BBs are also poised to record gains for a fifth week as yields linger close to a three-year low.
• Market bets for a rate cut improved after Fed Governor Christopher Waller said earlier in the week that the central bank should begin lowering rates this month and make “multiple cuts in the coming months.”

(Bloomberg)  Weak US Payroll Gain of 22,000 Cements Case for Fed Rate Cut

• US job growth cooled notably last month while the unemployment rate rose to the highest since 2021, fanning concerns the labor market may be on the cusp of a more significant deterioration.
• Nonfarm payrolls increased 22,000 in August, according to a Bureau of Labor Statistics report out Friday. Revisions showed employment shrank in June — the first payrolls decline since 2020. The jobless rate ticked up to 4.3%.
• Traders solidified bets that the Federal Reserve will cut interest rates at its Sept. 16-17 meeting, which Chair Jerome Powell signaled in a speech last month during the central bank’s annual Jackson Hole symposium. Stock futures and Treasuries rallied following the report.
• The figures will likely heighten concerns about the durability of the labor market after the prior month’s report showed a shockingly cooler hiring picture than previously thought. Job gains have moderated materially in recent months, openings have declined and wage gains have eased, all of which are weighing on broader economic activity.
• Several sectors, including information, financial activities, manufacturing, federal government and business services, posted outright declines in August. Job growth was concentrated in health care and leisure and hospitality.
• While July payrolls were revised slightly higher, the jobs picture looked even worse in June. The adjustments follow the sizable downward revisions seen in the last jobs report, which were the largest since 2020.
• Accounting for the revisions in this report, employment growth in the last three months has averaged just 29,000. Payrolls have come in under 100,000 for four straight months, extending the weakest stretch of job growth since the pandemic.

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.

(Bloomberg)  High Yield Market Highlights

• The US junk bond rally hit a pause as yields crossed the 7% mark to close at a three-week high of 7.04%, after rising for four sessions, the longest streak since early April. Spreads closed at a two-week high of 287 basis points after climbing eight basis points in the last four sessions. Rising yields and steadily widening spreads drove losses for the third consecutive session and the biggest one-day loss in three weeks.

• The rally lost steam after the minutes of the last Fed meeting showed that most policy makers were concerned about inflation risks in the coming months. Momentum faded further ahead of Chair Powell’s speech at the gathering of central bank officials in Jackson Hole later Friday.
• Bloomberg economists Anna Wong and Chris G Collins expect Powell to acknowledge labor market weakness, while also maintaining that demand and supply have offset each other as reflected in the low unemployment rate
• While data showed the labor market weakening, the solid factory purchasing managers index dampened hopes of a rate cut in September. Traders trimmed their bets for a rate cut in September. The probability of a rate cut in the next meeting dropped to about 71% from 100% a few days ago.
• A bevy of Fed officials continue to say inflation risks outweigh their concerns about weaker employment
• Chicago Fed President Austan Goolsbee said while some recent inflation readings have come in better than expected, he hopes one “dangerous” data point is just a blip, referring to the data showing services inflation shooting up
• The decline extended across the market. BB yields are up six basis points for the week and closed at a two-week high.
• CCCs extended their modest loss for the fourth session in a row. Yields rose 27 basis points in four sessions to a nearly five-week high of 10.78%, and spreads to a three-week high of 670 basis points. Spreads widened for the sixth consecutive session, the longest streak since April

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.