Author: Rich Balestra - Portfolio Manager

(Bloomberg)  High Yield Market Highlights

• US junk bonds shrugged off equity volatility to notch up gains for the fifth straight session.
• The junk market printed a weekly gain, rebounding from last week’s losses. Yields dropped 43 basis points for the week to close at 8.19%, the biggest weekly decline since December 2023.
• The junk bond market on Wednesday brushed aside Powell’s warnings that he expects unemployment and inflation both to be heading away from the Fed’s goals for the balance of the year
• The market also overlooked Powell’s emphasis that the central bank is well-positioned to wait for greater clarity on tariffs before making adjustments to the current monetary policy, dashing expectations of a rate cut soon
• The broad rally in the US junk bond market extended across ratings. BB yields dropped for the fifth consecutive session declining 35 basis points this week. B yields dropped 44 basis points. CCC yields dropped 63 basis points.
• The primary market stayed quiet after LNG producer Venture Global braved the volatile market and took advantage of the rally this week
• The continuing tariff volatility and broad risk aversion have brought the primary market to a halt
• The market turmoil brought back unpleasant memories of 2022, when Wall Street banks were stuck with huge debt on their balance sheets as planned leveraged buyouts could not come to fruition after an unexpected and steep rate hike
• Wall Street lenders were stuck with $2.2b in debt provided to fund Apollo’s acquisition of a Canadian auto parts company, after being unable to sell loans and bonds before the deal closed
• The market is also watching the status of debt deals related to acquisitions that are set to close this month

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 third weekly loss after dropping in five of the last six sessions, spurred by US tariffs and the continuing trade war with China. Yields surged 32 basis points in four sessions this week, the third consecutive week of rising yields.
• The euphoria after President Trump agreed to a 90-day pause of reciprocal tariffs on dozens of trading partners was short-lived. US high-yield funds reported an outflow of $9.6 billion, the biggest since 2005.
• The losses accelerated after a bevy of Fed officials repeatedly asserted that tariff-driven inflation would delay interest-rate cuts
• “Given the paramount importance of keeping long-run inflation expectations anchored and the likely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economy and potentially increased unemployment is higher,” Minneapolis Fed President Neel Kashkari wrote in an essay released Wednesday morning. “The hurdle to change the federal funds rate one way or the other has increased due to tariffs”
• “To sustainably achieve both of our dual-mandate goals, it will be important to keep any tariff-related price increases from fostering more persistent inflation,” Dallas Fed President Lorie Logan said Thursday in prepared remarks for an event at the Dallas Fed. “For now, I believe the stance of monetary policy is well positioned,” she added
• “Renewed price pressures could delay further policy normalization, as confidence is needed that the tariffs are not destabilizing inflation expectations,” Boston Fed President Susan Collins said in remarks prepared for an event Thursday at Georgetown University in Washington
• The rapid onslaught of conflicting news will likely persist, causing ongoing volatility in the markets, Barclays strategists Brad Rogoff and Dominique Toublan wrote this morning
• Furthermore, there are still structural questions to be answered. The overall current level of tariffs for the next 90 days is still higher than 20%, they added
• The losses extended across the ratings spectrum, with BB yields hovering near a 16-month high and up 31 basis points in the last four sessions. This will be third straight week of rising yields
• CCCs, the riskiest tier of the junk bond market, is also poised to notch up losses for the third week in a row, the longest losing streak in 12 months
• CCC yields rose 71 basis points so far this week to close at 12.80%, set for its third successive weekly advance
• While the US paused reciprocal tariffs on some countries, the tariffs on steel, aluminum and automobiles stay at current rates
• Tariff volatility, rising yields and widening spreads brought primary market to a screeching halt

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 spreads widened to a 16-month high, the most since the pandemic in March 2020, as global markets were hit by US tariffs.
• Yields surged to a nine-month high, hovering near 8%, after rising the most in more than two years.
• Soaring yields and widening spreads triggered a 0.94% loss on Thursday, the biggest daily drop in more than two years
• The primary market ground to a halt as risk wary investors fled to US Treasuries, with the 10-year Treasury yield falling below 4%. There was only one new debt sale in the past.
• JPMorgan sweetened terms on a struggling bond offering for a high yield company that stalled last week amid heightened volatility caused by tariffs and plunging consumer confidence
• If these tariffs are implemented fully, it would push the US and global economy into recession this year, JPMorgan’s credit strategists Eric Beinstein and Nathaniel Rosenbaum wrote this morning
• Apollo’s chief economist Torsten Slok estimates that the effective tariff rate would be 22% and its impact on inflation will be +1.5% and GDP -1.5%
• While the new tariffs are seen as the starting point for long, drawn-out negotiations, the trade conflict could escalate further in the near term, JPMorgan strategist Daniel Lamy wrote in note.
• He warns of retaliation from some countries, which could spark additional measures from the US.
• Lamy also noted that the US has threatened sectoral tariffs on pharmaceuticals, semiconductors, critical minerals and lumber

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 continued to retreat on renewed concerns prompted by tariffs on automakers that could provoke a large scale trade war, nullifying the impact of data showing US economy expanded faster-than-expected in the fourth quarter of last year.
• The market stumbled for the second straight session on Thursday as yields surged six basis points to a two-week high of 7.63% and spreads widened eight basis points to 322. It is on track for a modest weekly loss of 0.19% after notching up declines in two of the last four sessions.
• The impact of auto tariffs was immediate in the high-yield primary market as it triggered widepread worries that autopart maker Forvia may be forced to withdraw its debt offering. All outstanding auto bonds across the auto sector plummeted
• While imposing a 25% tariff on automakers, the US also threatened harsher penalties on the EU and Canada should they unite against the US and impose reciprocal taxes, escalating market volatility and stamping down risk appetite
• Amid pandemonium in the equity markets and all the noise around tariffs, the junk bond primary market continued to do business
• US borrowers are rushing to sell debt amid concerns that growth could slow and dampen risk appetite sooner than later
• Tuesday was the busiest since January in the primary market
• The losses in the secondary market spanned across ratings. CCC yields rose to 10.57%, prompting a loss of 0.16% on Thursday
• BB yields climbed to 6.39% and spreads rose above 200 basis points, pushing a loss of 0.17% on Thursday. BBs are also on track to post a modest loss this week
• The losses were sparked by renewed worries about tariffs fueling inflation and forcing the Federal Reserve to keep rates higher for longer, disrupting growth and employment
• Boston Fed President Susan Collins joined the chorus and said it looks “inevitable” that tariffs will boost inflation, at least in the near term, adding it’s likely appropriate to keep interest rates steady for longer.
• Earlier in the week, Minneapolis Fed President Neel Kashkari said inflation is “above our 2% target” and so the central bank has a lot of work to do to lower that
• And Alberto Musalem, President of Louis Fed, said it’s not clear any inflationary impact from tariffs will prove temporary, and he cautioned that secondary effects could prompt officials to hold interest rates steady for longer

(Bloomberg)  US Consumer Spending Barely Rises, Key Inflation Gauge Picks Up

• Consumer spending was weaker than expected again in February while a key inflation metric picked up, in a double whammy for the economy before the brunt of tariffs.
• Inflation-adjusted consumer consumption edged up 0.1%, below all but one estimate from economists, after a slump January that analysts mostly blamed on bad weather. Notably in February, Americans reduced spending on services for the first time in three years in the face of higher prices — including on dining out.
• “Consumers are resistant to price increases,” Neil Dutta, head of US economics at Renaissance Macro, said in a note. “Ultimately, inflation boils down to a household’s budget constraint and conditions are deteriorating here.”
• The Federal Reserve’s preferred inflation rose 0.4% from January, the most in a year, according to Bureau of Economic Analysis data out Friday. The so-called core personal consumption expenditures price index, which excludes food and energy items, was up 2.8% from last year, remaining stubbornly above the Fed’s 2% target.
• The report points to sticky inflation just as President Donald Trump’s planned tariffs risk stoking price pressures even further.
• The Fed’s own forecasts underscore those fears, as policymakers signaled slower growth and faster inflation in fresh projections released at last week’s policy meeting. Chair Jerome Powell downplayed those concerns, even reviving the loaded word “transitory” to describe his expectations for tariff-driven inflation.
• Officials are holding interest rates steady until they have a better sense of Trump’s policies — particularly tariffs, ahead of next week’s big rollout that the president has dubbed “Liberation Day.” While Trump imposed some levies on China last month, they didn’t seem to have much of an impact on price data, as consumer and producer prices both stepped down in February.
• Much of the tariff impact to prices would come through goods. A measure of goods inflation that excludes food and energy climbed 0.4% for a second month in February, the biggest back-to-back advance since 2022. Core services prices — a closely watched category that excludes housing and energy — rose at a similar pace.
• But spending on goods did bounce back in February on demand for durable goods like cars — perhaps a sign that some consumers are buying ahead of potential tariffs. Among services, a category that had been a consistent driver of spending growth in recent years, consumers reduced spending on veterinary services, as well as taxis and ridesharing.

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 surged to seven-month highs as risk premiums rose to levels not seen since August, driving the biggest one-day loss since December, amid the escalating trade war after Donald Trump threatened more tariffs on European exports.
• The risk premium for junk bonds, as reflected in spreads, closed at 335 after widening 22 basis points on Thursday, the biggest move in seven months.
• Credit spreads are not pricing in enough risk, Barclays strategists Brad Rogoff and Dominique Toublan wrote on Friday. Barclays revised its spread forecast for 2025 to 400-425 basis points versus its earlier forecast of 275-300 basis points
• As junk bonds plunged, yields jumped the most in seven months to close at 7.67%.
• Amid tumbling bond prices, rising yields and widening spreads, the primary market stalled on Thursday as US borrowers remained on the sidelines. Just $4b was priced this week compared with $8b last week
• The losses in the junk-bond market extended across ratings. CCCs, the riskiest segment, suffered the worst losses since last summer.
• CCC yields approached 11% on Thursday, rising 28 basis points. Yields were at a new six-month high
• BB spreads closed at 213, also a seven-month high. Yields closed at 6.44%, a two-month high. BBs racked up a loss of 0.33% on Thursday, the biggest one-day loss this year

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 racked up the biggest one-day loss in nearly eight weeks on Thursday as equities plunged. High-yield markets, which have been jittery amid evolving headlines over US tariffs, are on track for their biggest weekly loss since mid-December.
• Spreads surged to a near five-month high after jumping 11 basis points on Thursday and closing in on 300 basis points, the most in two months.
• Yields rose by nine basis points to a three-week high of 7.30%, the biggest one-day jump in seven weeks
• The losses spanned across ratings; CCC yields soared to a 7-week high of 10.18%, rising by 17 basis points, driving a loss of 0.33% on Thursday; CCCs are headed for their worst week in 10 months
• CCC spreads climbed to a more than four-month high of 587, rising by 19 basis points, the biggest one-day widening since September
• BB spreads widened 9 basis points to 185 and yields advanced to a three-week high of 6.21%
• While there was a selloff in equities amid policy uncertainty, the US junk bond primary market continued at a steady pace
• 10 borrowers sold debt this week; 2 borrowers sold more than $2b on Thursday driving the week’s supply to more than $8b
• 8 of the 10 companies sold bonds with BB ratings, the best credit quality in the high-yield universe

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 defied policy uncertainty, elevated volatility, and tumbling equities as they headed for their second monthly gain this year, with modest returns of 0.6%. Yields also declined for the second consecutive month, falling six basis points to 7.14%.
• The broad gains in the US junk bond market extended across all ratings. The rally was partly fueled by light supply. The year-to-date volume is at $40b, down 31% from the same period last year. February supply stands at $18b, down 32% from last February.
• The US high yield market shrugged off rising inflation expectations, a sharp decline in home sales, weakening consumer confidence, and repeated assertions by various Fed officials including Chair Powell that the rates are likely to stay higher for longer
• US high yield spreads held firm, widening just 14 basis points so far this month, even though the 10- and 5-year Treasury yields fell 28 and 20 basis points. The 5-year Treasury yield closed at a more than a two-month low, reflecting the flight to safety
• BB spreads, which are the most rate sensitive, widened 17 basis points for the month to 173. Yields fell three basis points to 6.11%, their second monthly decline. The index registered gains of 0.65% in February
• CCCs racked up gains for the 10th straight month, the longest winning streak since June 2021. The gains were modest and the lowest in the US high yield universe. CCC yields jumped to close at 9.88% and spreads widened 35 basis points to close at 553. CCCs have started coming under pressure

(Bloomberg)  Fed’s Favored Inflation Gauge Rises at Mild Pace, Spending Falls

• The Federal Reserve’s preferred measure of underlying inflation rose at a mild pace in January, offering some relief after a string of reports suggested price pressures are heating up again, while consumers pulled back on spending.
• The so-called core personal consumption expenditures price index, which excludes food and energy items, rose 0.3% from December. From a year ago, it increased 2.6%, matching the smallest annual increase since early 2021, Bureau of Economic Analysis data out Friday showed.
• Inflation-adjusted consumer spending fell 0.5%, marking the biggest monthly decline in almost four years amid extreme winter weather after a robust holiday season. The outsize decline in spending was driven by a drop in durable goods purchases, and may raise concerns about the resilience of the US economy.
• Still, Friday’s report also offers some relief on the inflation front after other reports on prices have suggested progress has not only stalled but is now reversing. Fed officials have indicated they need to see a meaningful easing in inflation before they begin lowering interest rates again, especially when they factor in the uncertainty around how President Donald Trump’s policies will impact prices.
• US Treasury yields fluctuated following the release, while stock futures and the dollar remained higher.

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 edged up, looking through trade tariffs noise and mixed earnings, with Walmart posting disappointing forecasts on Thursday. Traders awaited manufacturing PMI data due later today for clues on the interest-rates path.
• Higher yields continued to bring borrowers into the market
• Four companies sold a little more than $3b in just three sessions to drive the month’s volume to $16b
• Spreads remain tight, bolstered by strong technicals and demand for all-in yield, strategists Brad Rogoff and Dominique Toublan from Barclays wrote this morning
• There is a lack of near-term catalyst to materially disrupt credit markets, they added
• Yields closed at 7.20% and spreads at 261 basis points
• CCC yields closed at 9.84% and spreads unchanged at 530

(Bloomberg)  Fed Minutes Signal Officials on Hold Until Inflation Improves

• Federal Reserve officials in January expressed their readiness to hold interest rates steady amid stubborn inflation and economic-policy uncertainty.
• “Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate,” minutes from the Federal Open Market Committee’s Jan. 28-29 meeting showed.
• The minutes, released Wednesday in Washington, said “many participants noted that the committee could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated.”
• Officials held the Fed’s benchmark policy rate in a range of 4.25%-4.5% at that gathering.
• The record of the meeting underscored the cautious approach Fed policymakers are taking after lowering interest rates by a percentage point in the closing months of 2024. Several officials have said they’d like to see inflation cool further toward the Fed’s 2% target before backing another cut.
• Investors are currently pricing in one rate cut in 2025, with the possibility of a second, according to futures markets.
• Policymakers are watching the rollout of Trump’s economic-policy plans and how they might shape the economy. Trump is pushing an agenda that includes an increased use of tariffs on US trading partners and an immigration crackdown, both of which could affect the outlook for inflation, the labor market and economic growth.
• While characterizing risks in the economy as roughly balanced, policymakers “generally pointed to upside risks to the inflation outlook,” the minutes said.
• “Participants cited the possible effects of potential changes in trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household spending,” the minutes showed.
• Still, officials expected that “under appropriate monetary policy” inflation would continue to decline toward their 2% goal.
• Some policymakers also noted that difficulties in fully removing seasonal distortions from inflation data at the start of the year could make the figures “harder than usual to interpret.”

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 snapped back on Thursday, notching the biggest one-day returns in a week after it became clear that reciprocal tariffs were not likely before April. Yields tumbled six basis points to 7.26%.
• The gains spanned across ratings. CCCs, the riskiest part of the high-yield market, racked up gains of 0.22%, the most in three weeks, after yields dropped eight basis points to 9.91%. Risk assets rallied across markets as stocks came close to their all-time highs.
• Undeterred by the heightened volatility and uncertainty around trade policy, bankers led by Morgan Stanley offloaded $4.7b of debt of X Holdings Corp, formerly known as Twitter, at par, tighter than early indications of 98 cents on the dollar. This was the third tranche in two weeks
• The high yield primary market priced two more deals, lifting the month’s supply to $13b
• Persistent yield-driven demand and still-intact fundamentals continue to underpin credit market stability, Brad Rogoff and Dominique Toublan at Barclays wrote on Friday
• Yields and spreads, though, moved in a narrow range this week amid daily uncertainty around tariffs and stubborn inflation data renewing concerns about Fed keeping rates higher for longer, disrupting steady growth

(Bloomberg)  US Inflation Tops Forecasts, Bolstering Case for Fed to Hold

• US inflation picked up broadly at the start of the year, further undercutting chances of multiple Federal Reserve interest-rate cuts this year.
• The monthly consumer price index rose in January by the most since August 2023, led by a range of household expenses like groceries and gas, as well as housing costs. Excluding often-volatile food and energy costs, the so-called core CPI climbed 0.4%, more than forecast, fueled by car insurance, airfares and a record monthly increase in the cost of prescription drugs.
• Inflation tends to come in higher in January, because many companies choose the start of the year to hike prices and fees. That pattern has been exacerbated in the post-pandemic era, and several forecasters suggested that the jump in price growth last month won’t be repeated going forward.
• Still, Wednesday’s report from the Bureau of Labor Statistics serves as further evidence that inflation progress has at least stalled — if not in danger of being reversed. Combined with a solid labor market, it will likely keep the Fed on hold for the foreseeable future. Policymakers are also awaiting further clarity on Trump’s policies.
• “We saw strength across the board — whether you’re looking at energy, food, within core components — and so I think it points to a price environment that still remains difficult as far as the Fed is concerned,” said Sarah House, a senior economist at Wells Fargo & Co. “So for how long you expected the Fed to be on hold going into this report, I think this only lengthens that time frame.”
• Fed Chair Jerome Powell, speaking before the House Wednesday, said the latest consumer price data show that while the central bank has made substantial progress toward taming inflation, there is still more work to do.
• “I would say we’re close, but not there on inflation,” Powell told the House Financial Services Committee in response to a question on the second day of his semi-annual testimony to Congress.
• The January increase in the CPI was led by grocery prices, with two-thirds of that advance due to higher egg prices in the wake of a deadly bird flu outbreak. The more-than 15% jump was the largest since June 2015. Costs of hotel stays and used cars also climbed, possibly in the aftermath of severe wildfires in Los Angeles.
• The report incorporated new weights for the consumer basket to try to more accurately capture Americans’ spending habits, which resulted in minimal revisions to the CPI last year.
• Seasonal adjustments to January data were also minimal, and failed to offset the turn-of-the-year price hikes. As a result, “the sharp increase in the core CPI is less alarming than it first appears,” Sam Tombs, chief US Economist at Pantheon Macroeconomics, said in a note. “We recommend waiting for February’s data, when the new seasonal factors look set to dampen the seasonally adjusted index more than in previous years, before judging how the underlying trend has evolved.”
• Goods costs excluding food and energy rose by the most since May 2023. However, when removing used cars, the index was little changed.
• Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. A separate report Wednesday that combines the inflation figures with recent wage data showed real hourly earnings grew 1% from a year ago.

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.