Author: Rich Balestra - Portfolio Manager

04 Nov 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.7 billion and year to date flows stand at -$55.1 billion.  New issuance for the week was $1.5 billion and year to date issuance is at $93.5 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are set for the biggest weekly loss in six, snapping a two-week gaining streak as yields surge to 9.22% as recession fear spurred a selloff in equities and an extreme inversion in a key portion of the Treasury yield curve. The low-grade market erased most recent gains across ratings. CCCs, the riskiest of junk bonds, posted a loss of 1.04% Thursday, the biggest one-day fall in more than four months. That’s put the notes on track to end a two-week gaining stretch, with a week-to-date drop of 1.08%.
  • The October rally fueled and lured investors into junk bond market as US high-yield funds reported a cash intake of $4.7b for the week, the third biggest weekly inflow this year.
  • The cash haul came in at the time of acute shortage of new supply, bolstering secondary market prices as investors looked for new paper. The primary market was mostly quiet until this week.
  • The rally brought some relief to bankers who have long waited to clear all pending deals to fund leveraged buyout. Apollo’s Tenneco was the first to get out of the gate earlier this week. Nielsen Holdings, a US TV rating business firm, kicked off a bond sale Wednesday to fund its buyout by Elliott Investment Management and Brookfield Asset Management.
  • Satellite TV company Dish Network also jumped into the market Wednesday to start marketing 5-year notes to fund the build-out of wireless infrastructure, among other purposes.
  • The rally was sapped after the Federal Reserve signaled a higher terminal rate against a backdrop of slowing growth.
  • Despite continued near-term  pressures Morgan Stanley expects a “significant deceleration in the inflation path” to take hold by mid-2023, Morgan Stanley’s Srikanth Sankaran wrote last week.

 

(Bloomberg)  Powell Sees Higher Peak for Rates, Path to Slow Tempo of Hikes

  • Federal Reserve Chair Jerome Powell opened a new phase in his campaign to regain control of inflation, saying US interest rates will go higher than earlier projected, but the path may soon involve smaller hikes.
  • Addressing reporters Wednesday after the Fed raised rates by 75 basis points for the fourth time in a row, Powell said “incoming data since our last meeting suggests that ultimate level of interest rates will be higher than previously expected.”
  • Powell said it would be appropriate to slow the pace of increases “as soon as the next meeting or the one after that. No decision has been made,” he said, while stressing that “we still have some ways” before rates were tight enough.
  • “It is very premature to be thinking about pausing,” he said.
  • The Federal Open Market Committee said that “ongoing increases” will still likely be needed to bring rates to a level that are “sufficiently restrictive to return inflation to 2% over time,” in fresh language added to their statement after a two-day meeting in Washington.
  • The Fed’s unanimous decision lifted the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008.
  • “Slower for longer,” declared JP Morgan Chase & Co, chief US economist Michael Feroli in a note to clients. “The Fed opened the door to dialing down the size of the next hike but did so without easing up financial conditions.”
  • Officials, as expected, said they will continue to reduce their holdings of Treasuries and mortgage-backed securities as planned.
  • The higher rates go, the harder the Fed’s job becomes. Having been criticized for missing the stubbornness of the inflation surge, officials know that monetary policy works with a lag and that the tighter it becomes the more it not only slows inflation, but economic growth and hiring too.
  • Still, Powell stressed that they would not blink in their efforts to get inflation back down to their 2% target.
  • “The historical record cautions strongly against prematurely loosening policy,” he said. “We will stay the course, until the job is done.”
  • Fed forecasts in September implied a 50 basis points move in December, according to the median projection. Those projections showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024. Powell’s remarks made clear that the peak signaled in that projection would be higher if it came at this meeting.
  • No fresh estimates were released at this meeting and they won’t be updated again until officials gather Dec. 13-14, when they will have two more months of data on employment and consumer inflation in hand.

 

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.

28 Oct 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.7 billion and year to date flows stand at -$59.9 billion.  New issuance for the week was nil and year to date issuance is at $92.0 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed for their biggest weekly gain in more than three months after a four-session rally as investors flooded the market with cash looking for new paper. A gauge of the debt rose 0.57% Thursday, the biggest one-day gain in more than three weeks. It was headed for the best week since June, up 1.93% so far this week.  The rally was partly fueled by investors returning to the asset class as US high-yield funds reported a cash influx of $3.7b for the week.
  • The cash haul came at a time when the junk bond primary market faced an acute shortage of new supply, helping to bolster secondary-market prices.
  • October supply is down by more than 85% from 2021; The year-to-date supply is the lowest since 2008 at $92b, versus more than $415b for the same period last year.
  • The recent rally in junk bonds suggests the high-yield market is slowly coming around to the view that inflation’s pace is slowing and may begin to decline in the middle 2023.
  • Despite continued near-term pressure, Morgan Stanley expects a “significant deceleration in the inflation path” to take hold by mid-2023, Srikanth Sankaran wrote on Monday.
  • A potential window of respite from rates volatility and a more dispersed period of earnings risk should help to provide tactical support for credit markets, Sankaran wrote.
  • Amid this issuance-starved market, a group of banks led by Citigroup may sell as soon as next month part of a leveraged loan that’s financing Apollo’s buyout of Tenneco, according to people with knowledge of the matter.
  • The rally extended across all high yield ratings. Yields tumbled to a five-week low of 9.12% after falling for five sessions in a row, the longest declining streak in almost three months. Yields fell 56bps in the last four sessions.
  • Single B and BB rated bond yields also fell to a five-week low of 9.35% and 7.33%, respectively.
  • CCCs, the riskiest of junk bonds are up 1.52% this week as of Thursday, set for the biggest weekly advance in almost three months. CCC yields dropped 38bps this week to close at 15.44%, a more than two-week low.

 

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.

14 Oct 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.0 billion and year to date flows stand at -$61.7 billion.  New issuance for the week was $1.2 billion and year to date issuance is at $89.6 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds shrugged off the equity rally as yields climbed toward 10%. CCC yields, the riskiest of junk bonds, jumped to a 30-month high of 15.79% after core US inflation rose by more than forecast, pressuring the Federal Reserve to keep raising interest rates again. Junk bonds are set to end the week with a decline, heading for a fourth weekly loss in five. The bonds were down 1.2% so far this week as yields rose to 9.70%.
  • The rise in core consumer price index only reinforced the Fed officials’ commitment to raise rates to a restrictive level in the near term and holding them there to curb inflation.
  • The heightened asset volatility, as the Fed is expected to hike another 75bp in November with core inflation at multi-decade highs, increases tail risks for the economy and markets, Barclays’s Brad Rogoff wrote on Friday.
  • The losses spanned across ratings in junk bond market, with CCCs posting losses of 1.44% week-to- date, the most in two weeks.
  • Macro volatility, steady losses and continuing concern that the Fed may disrupt growth rattled junk bond investors.
  • The high yield primary market volume has been low amid rising cost of debt.
  • Third quarter supply was a modest $19b, the lowest 3Q volume since 2008.
  • New bond sales in September totaled $9b, the slowest September since 2011.
  • Year-to- date volume was at $88b, the lowest since 2008 and down about 78% from 2021.

 

 

(Bloomberg)  Core US Inflation Rises to 40-Year High, Securing Big Fed Hike

  • A closely watched measure of U.S. consumer prices rose by more than forecast to a 40-year high in September, pressuring the Federal Reserve to raise interest rates even more aggressively to stamp out persistent inflation.
  • The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982, Labor Department data showed Thursday. From a month earlier, the core CPI climbed 0.6% for a second month.
  • The overall CPI increased 0.4% last month, and was up 8.2% from a year earlier.
  • The advance was broad based. Shelter, food and medical care indexes were the largest of “many contributors,” the report said. Prices for gasoline and used cars declined.
  • On the heels of a solid jobs report last week, the inflation data likely cement an additional 75-basis point interest rate hike at the Fed’s November policy meeting and spurred speculation for a fifth-straight increase of that size in December. Traders also priced in a higher peak Fed rate for next year.
  • Policy makers have responded with the most aggressive tightening campaign since the 1980s, but so far, the labor market and consumer demand have remained resilient. The unemployment rate returned to a five-decade low in September, and businesses continue to raise pay to attract and retain the employees needed to meet household demand.
  • The CPI report is the last one before next month’s U.S. midterm elections and poses fresh challenges to President Joe Biden and Democrats as they seek to retain thin congressional majorities. Already, the surge in inflation has posed a serious threat to those prospects.
  • Shelter costs — which are the biggest services’ component and make up about a third of the overall CPI index — rose 0.7% for a second month. Both rent of shelter and owners’ equivalent rent were up 6.7% on an annual basis, the most on record.
  • Economists see the housing components of the report as being elevated for quite some time, given the lag between real-time changes in rents and home prices and when those are reflected in Labor Department data. Bloomberg Economics doesn’t expect year-over-year rates for the major shelter components to peak until well into the second half of next year.
  • While the Fed bases its 2% target on a separate inflation measure from the Commerce Department — the personal consumption expenditures price index — the CPI is closely watched by policy makers, traders and the public.
  • Fed officials have repeatedly emphasized in recent weeks the need to get inflation under control, even if that means higher unemployment and a recession. In minutes from their September meeting released Wednesday, many policy makers emphasized “the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.”

 

 

 

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.

12 Oct 2022

2022 Q3 High Yield Quarterly

In the third quarter of 2022, the Bloomberg US Corporate High Yield Index (“Index”) return was ‐0.65% bringing the year to date (“YTD”) return to ‐14.74%. The S&P 500 stock index return was ‐4.89% (including dividends reinvested) for Q3, and the YTD return stands at ‐23.88%.

The 10 year US Treasury rate (“10 year”) generally marched higher after a small dip in July as the rate finished at 3.83%, up 0.82% from the beginning of the quarter. Over the period, the Index option adjusted spread (“OAS”) tightened 17 basis points moving from 569 basis points to 552 basis points. The higher quality segments of the High Yield Market participated in the spread tightening as BB rated securities tightened 50 basis points, and B rated securities tightened 12 basis points. Meanwhile, CCC rated securities widened 61 basis points. The chart below from Bloomberg displays the spread moves in the Index over the past ten years with an average level of 430 basis points.

The Energy, Transportation, and Other Industrial sectors were the best performers during the quarter, posting returns of 1.28%, 1.20%, and 0.54%, respectively. On the other hand, Banking, Consumer Non‐Cyclical, and Brokerage were the worst performing sectors, posting returns of ‐3.91%, ‐2.82%, and ‐2.06%, respectively. At the industry level, aerospace and defense, refining, and gaming all posted the best returns. The aerospace and defense industry posted the highest return 3.49%. The lowest performing industries during the quarter were pharma, healthcare REIT, and retailers. The pharma industry posted the lowest return ‐9.57%. Crude oil has continued trending lower as can be seen on the chart at the left. OPEC+ members just met and agreed to cut oil production by two million barrels per day in a bid to help support the price of oil in the face of a weakening global economy. However, it is noted that the impact to supply is likely to be smaller than the headline number. “OPEC and its partners have been meeting online on a monthly basis and weren’t expected to arrange an inperson gathering until at least the end of this year. The slump in prices may have been what prompted the change of tack, requiring the first face‐to‐face talks since 2020.”i

The primary market remained very subdued during the third quarter. The weak market led to year‐to‐date issuance of $95.2 billion and $19.6 billion in the quarter. That is the lowest quarter of issuance in four years. Discretionary took 37% of the market share followed by Technology at a 28% share. Currently, there isn’t much concern for lack of capital access due to issuers being so proactive with refinancing in the past few years. In fact, only about $50 billion in high yield bonds are due to mature from now through the end of 2023.

After the Federal Reserve lifted the Target Rate by 0.75% at their June meeting, Fed Chair Jerome Powell acknowledged that the hike was “an unusually large one.” It may have been a large one, but apparently it was not enough as the Fed raised an additional 0.75% at both the July and September meetings. For those keeping score, that brings the Fed to 300 basis points of raises this year.

The dot plot chart shows how the Fed projections of the 2022 year‐end Target Rate have evolved over the past year. The Fed was clearly behind the curve and now believes stuffing the market with three consecutive “unusually large” hikes in a singular bid to break inflation is the appropriate move, notwithstanding all the other consequences. “We have always understood that restoring price stability while achieving a relatively modest increase in unemployment and a soft landing would be very challenging,” Powell said. “We have got to get
inflation behind us. I wish there were a painless way to do that. There isn’t.”ii Based on the Fed’s Summary of Economic Projections, they accept that the continuing rate hikes are going to lower growth and push up unemployment.

Intermediate Treasuries increased 82 basis points over the quarter, as the 10‐year Treasury yield was at 3.01% on June 30th, and 3.83% at the end of the third quarter. The 5‐year Treasury increased 105 basis points over the quarter, moving from 3.04% on June 30th, to 4.09% at the end of the third quarter. Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the Target Rate. The revised second quarter GDP print was ‐0.6% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2022 around 1.6% with inflation expectations around 8.0%.iii

Being a more conservative asset manager, Cincinnati Asset Management Inc. does not buy CCC and lower rated securities. Additionally, our interest rate agnostic philosophy keeps us generally positioned in the five to ten year maturity timeframe. Due to the continued rate moves, this positioning was a detractor of performance in the quarter as short‐end maturities outperformed. Further, our credit selections within communications and energy were a drag on performance. Benefiting our performance was our lack of exposure to pharma and our credit selections within healthcare. All totaled, the CAM High Yield Composite Q3 net of fees total return of ‐1.38% underperformed the Index. The Composite YTD net of fees total return of ‐17.06% also underperformed the Index.

The Bloomberg US Corporate High Yield Index ended the third quarter with a yield of 9.68%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), had an average of 25 over the quarter moving from a low of 20 in mid‐August to a high of 32 atthe end of September. For context, the average was 15 over the course of 2019, 29 for 2020, and 19 for 2021. The third quarter had two bond issuers default on their debt. The trailing twelve month default rate stands at 0.83%.iv The current default rate is relative to the 0.92%, 0.27%, 0.23%, 0.86% default rates from the previous four quarter end data points listed oldest to most recent. The fundamentals of high yield companies still look good considering the economic backdrop. From a technical view, fund flows were positive in July but negative in August and September. The 2022 year-to‐date outflow stands at $61.5 billion.v Without question there has been a fair amount of damage in bond markets so far this year. It is important to remember that bonds are a contractual agreement with a defined maturity date. Thus, despite price volatility, without default, par will be paid at the stated maturity date. Currently, defaults are quite low and fundamentals are still providing a cushion. No doubt there are risks, but
we are of the belief that for clients that have an investment horizon over a complete market cycle, high yield deserves to be considered as part of the portfolio allocation.

As we move into the last quarter of 2022, fixed income markets remain pressured as the Fed continues raising the Target Rate. The US dollar has been moving higher all year. Over 80% of central banks around the world are now hiking, the highest percentage on record.vi Japan has taken to currency intervention. The Bank of England is hiking while the British government is pushing through their largest tax cut package since 1972. Citi’s London team commented that euro credit markets are disorderly. Subsequently, the Bank of England started buying gilts while some of the tax cut package was walked back. Back in the US with the message from the Fed steadfast, caution is warranted as uncertainty remains around the cycle’s terminal rate and the resulting depth of an intentional economic slowdown. Markets have been roughed up this year, but brighter days will eventually appear. As this cycle plays out, current uncertainty and volatility can create opportunities that lead back to positive returns. Our exercise of discipline and selectivity in credit selections is important as we continue to evaluate that the given compensation for the perceived level of risk remains appropriate. As always, we will continue our search for value and adjust positions as we uncover compelling situations. Finally, we are very grateful for the trust placed in our team to manage your capital.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

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

i Bloomberg October 4, 2022: OPEC+ Considers Output Limit Cut
ii Bloomberg September 22, 2022: Powell Signals Recession May Be the Price for Crushing Inflation
iii Bloomberg October 3, 2022: Economic Forecasts (ECFC)
iv JP Morgan October 3, 2022: “Default Monitor”
v Wells Fargo September 29, 2022: “Credit Flows”
vi Goldman Global Markets Insights September 23, 2022: Markets/Macro

07 Oct 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.8 billion and year to date flows stand at -$60.7 billion.  New issuance for the week was nil and year to date issuance is at $88.3 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds were headed for a weekly gain heading into the jobs report on Friday morning, as yields moved to 9.13% from 9.88%, the highest since April 2020.
  • The gains came amid weak US manufacturing data and a 14-month low in US job openings.
  • The junk-bond rally followed a broad risk-on move as equities rebounded from the worst monthly loss in more than two years in September.
  • Still, the gains may be short-lived as Fed officials warn that market expectations for a pivot are misplaced and that there’s a need to boost rates to “restrictive territory.”
  • Continuing macro uncertainty, rising oil prices and steadily rising yields have turned issuers away from the primary market.
  • The sudden rally in junk bonds after the September losses brought investors back to the asset class with a cash inflow of just under $1b this week.

 

(Bloomberg)  US Jobs Rise While Unemployment Drops, Keeping Pressure on Fed

  • U.S. employers continued to hire at a solid pace last month and the jobless rate unexpectedly returned to a historic low, indicating a sturdy labor market that puts the inflation-focused Federal Reserve on course for another outsize interest-rate hike.
  • Nonfarm payrolls increased 263,000 in September after a 315,000 gain in August, a Labor Department report showed Friday. The unemployment rate unexpectedly dropped to 3.5%, matching a five-decade low. Average hourly earnings rose firmly.
  • The median estimates in a Bloomberg survey of economists called for a 255,000 advance in payrolls and for the unemployment rate to hold at 3.7%. Hiring was relatively broad based, led by gains in leisure and hospitality and health care.
  • The figures are the latest illustration of the perennial strength of the US job market. While there have been some indications of moderating labor demand — most notably a recent decline in job openings and an uptick in layoffs in some sectors — employers, many still short-staffed, continue to hire at a solid pace. That strength is not only underpinning consumer spending but also fueling wage growth as businesses compete for a limited pool of workers.
  • The Fed, meanwhile, is hoping to see a significant softening in labor market conditions, with the goal of cooling wage growth and ultimately inflation. While the payrolls advance was the smallest since April 2021, policy makers are watching to see if their rate hikes spur an increase in the unemployment rate.
  • This is the last jobs report Fed officials will have in hand before their November policy meeting as they consider a fourth-straight 75-basis point interest-rate hike. Fresh inflation data out next week will also play a fundamental role in their decision making. The report is projected to show the depth and breadth of the Fed’s inflation problem, with a key gauge of consumer prices potentially worsening.
  • The labor force participation rate — the share of the population that is working or looking for work — eased to 62.3%. Among those ages 25 to 54, it also dipped.
  • The jobs report showed average hourly earnings were up 0.3% from August and up 5% from a year earlier, a slight deceleration from the prior month but still historically elevated. The solid increase suggests the Fed will have to continue to raise interest rates as it aims to rein in rapid wage growth that has bolstered household spending.
  • Central bank officials have been clear recently about their commitment to taming inflation, even if that leads to higher unemployment and recession, because they say that failing to do so would be worse for Americans. Fed Chair Jerome Powell said last month that slower growth and a softer labor market are painful for the public, but that there isn’t a “painless” way to get inflation down.

 

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.

16 Sep 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at -$54.8 billion.  New issuance for the week was $3.0 billion and year to date issuance is at $82.3 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed for a weekly loss to end the August rebound after a higher-than-expected inflation reading on Tuesday triggered a broad market selloff.  Yields surged to a two-month high of 8.61% after steadily rising for three straight sessions, pushing the week-to-date loss to 1.5%.
  • The losses extended across ratings in the U.S. high yield market, with CCCs leading the pack with the worst week-to- date loss of 1.7%, after sliding for three consecutive sessions. Yields rose to a two-week high of 13.72% and spreads were approaching distressed levels.
  • The primary market was suddenly jolted after the CPI data earlier in the week fueled concerns that the Federal Reserve may need to raise benchmark interest rate by even 100bps to tame inflation and trigger a recession.
  • The primary market may pause after the Citrix debt sale was used to assess the risk appetite and clearing price levels for new debt amid rising rates and slowing economy. Nielsen Holdings and Tenneco are among the other leveraged buyouts in the queue to sell debt at some point.

 

(Bloomberg)  Inflation Surprise Puts Onus on Fed to Hit Brakes Even Harder

  • The U.S. economy has shown surprising resilience in the face of the fastest inflation and interest-rate hikes in a generation. That means the Federal Reserve will have to stomp even harder on demand.
  • What started as a pandemic-driven supply shock has morphed into widespread inflation rooted just as much in resilient demand, underscored by unexpectedly high numbers that dashed hopes price gains were ebbing. While consumers are showing some signs of slowing, they’re still largely keeping up with persistent price pressures, powered by historic wage gains.
  • All told, the Fed has a much harder task on its hands than previously thought. If Americans won’t dial back spending further, odds favor the central bank becoming that much more aggressive to take more wind out of the economy’s sails with the goal of bringing inflation down.
  • “It tells you that it’s going to take a longer time, and will require higher rates — and in macro language, maybe even require more demand destruction,” as in higher unemployment and slower growth, said Torsten Slok, chief economist at Apollo Management. “It raises the probability of a recession.”
  • Consumer prices advanced by more than forecast in August, defying expectations for a monthly drop due to falling gasoline prices. Shelter, food and medical care were among the largest contributors to price growth, underscoring the breadth and severity of inflation with several categories posting record increases.
  • “My experience with inflation is that some of the components that were very strong in today’s report, they tend to be sticky and have a lot of inertia,” like rent, said Blerina Uruci, U.S. economist at T. Rowe Price Associates. “So I would expect those to remain pretty strong in the coming months.”
  • The Atlanta Fed’s so-called sticky CPI measure rose 6.1% in August from a year ago, the biggest gain in 40 years. Meantime, the Cleveland Fed’s median CPI, which excludes categories with the largest price changes, increased by the most in data back to 1983.
  • Excluding the volatile food and energy categories, the so-called core CPI climbed 0.6% from July, double the median estimate in a Bloomberg survey of economists. The core measure rose 6.3% from a year ago, the first acceleration in six months and near a four-decade high, the Labor Department’s report showed.
  • “The composition is even more troubling than the aggregate reading,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note. “Outside of falling gasoline prices, inflation appears to be just as hot as ever, which means that the Fed still has plenty of work to do.”
  • It also means that the Biden administration and fellow Democrats have plenty of work to do, as the latest data may threaten what had been growing optimism in the party that they would hold their congressional majorities in November.
  • Traders are now fully expecting the central bank to raise interest rates by another 75 basis points when policy makers meet next week, which would be the third-straight hike of that size. They’re also upping bets that officials will go bigger at their November gathering and see the tightening cycle peaking around 4.3% early next year — more than a quarter-point higher than what was projected before the CPI report.
  • Chair Jerome Powell has communicated a stronger resolve to stamp out inflation since the Fed’s summit in Jackson Hole last month, signaling that the central bank is likely to keep raising interest rates and leave them elevated for a while. He’s stuck to that hawkish view and several of his colleagues also support hiking rates to a point that more clearly restricts demand.

 

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.

26 Aug 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$4.1 billion and year to date flows stand at -$48.3 billion.  New issuance for the week was $0.4 billion and year to date issuance is at $79.3 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds head toward a loss for the second consecutive week as investors pull $4.1 billion from US junk bonds for the second-biggest such withdrawal of the year on renewed concerns about recession.
  • Yields surged and spreads widened across ratings for the second consecutive week, ending a rally that began in July and extended to the first two weeks of August.
  • Junk bond yields rose 20bps this week to near 8%. Spreads widened 14bps to +446.
  • BBs, the most rate-sensitive in the junk bond market, are moving toward a big loss in August, with month-to-date losses at 1.15% for the worst performing asset in the US high-yield market.
  • BBs are on track to end with losses for the second straight week.
  • CCC spreads have steadily climbed back to distressed levels widening 52bps week-to-date to +975. The index is also expected to end the week in red, with week-to-date losses at 0.78%.

 

(Bloomberg)  Powell Says History Warns Against Prematurely Loosening Policy

  • Federal Reserve Chair Jerome Powell signaled the US central bank is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation, and he pushed back against any idea that the Fed would soon reverse course.
  • “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
  • He said restoring inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.
  • “Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” he said.
  • “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Powell said.
  • Other Fed speakers in recent days have also pushed back against expectations, priced into futures markets, that the Fed would raise rapidly to a restrictive policy stance and then begin to ease.
  • Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.
  • Inflation according to the Fed’s preferred measure rose 6.3% for the 12-month period ending July, according to a government report released earlier on Friday , while the core measure minus food and energy rose 4.6%.
  • “While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” the Fed chief told the audience.
  • “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.”
  • Fed officials in June projected rates rising to 3.4% by the end of this year, according to their median estimate, and 3.8% by end 2023. They will update those forecasts in September.

 

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.

19 Aug 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at -$44.1 billion.  New issuance for the week was $4.7 billion and year to date issuance is at $78.9 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are on track to end the six-week gaining streak after steadily falling for three consecutive sessions, with a week-to-date loss of 0.67%. Yields jump 16bps week-to-date to 7.59%, rising for the first time in seven weeks and the biggest weekly leap since early July after Federal Reserve minutes noted risks from the central bank tightening more than necessary. The losses stretched across the high yield market, with CCCs headed toward its first weekly loss, falling by a modest 0.29% and snapping the four-week rally. The losses followed a three-day decline, the longest losing streak in five weeks.
  • CCC yields are headed toward the biggest weekly surge since July 1, rising 28bps week-to-date to 12.51%.
  • Junk bond losses accelerated after mixed signals from different FOMC voting members, causing uncertainty over the extent of rate hikes in the coming months and its impact on growth.
  • The primary market saw some borrowers rush in a hurry to take advantage of the risk-on move ahead of Jackson Hole symposium next week where the Fed could reiterate that it was focused on taming inflation and the fight against inflation continues.
  • The issuance volume this week totals almost $5b, the busiest since early June.
  • The month-to-date supply tally was at a modest $8b, the slowest August since 2014.
  • The junk bond market may extend the decline on Friday amid a broader risk-off move. U.S. equity futures sank with Treasuries after a chorus of Federal Reserve officials reiterated their resolve to continue rate hikes and traders raised tightening wagers for other major central banks.

 

(Bloomberg)  Fed Officials Offer Mixed Signals on Size of September Rate Hike

  • U.S. central bankers offered divergent signals over the size of the next interest-rate hike, with St. Louis’s James Bullard urging another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone.
  • Bullard, who is one of the most hawkish policy makers at the U.S. central bank, told the Wall Street Journal in an interview published Thursday that he favored going big again, arguing “we should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation.”
  • “I don’t really see why you want to drag out interest rate increases into next year,” he said.
  • The Fed in July raised the target range for its benchmark rate by three-quarters of a percentage point to 2.25% to 2.5%, following a similar-sized hike in June to cool the hottest inflation in 40 years. Officials have since signaled that either 50, or another 75 basis points, were on the table for their Sept. 20-21 meeting, depending on the data. They get fresh monthly readings on inflation and employment between now and then.
  • Both Bullard and George are voters this year on the rate-setting Federal Open Market Committee. But George, who hosts the Fed’s annual policy retreat next week in Jackson Hole, Wyoming, has sounded more dovish than Bullard in recent months, after many years of being viewed as a hawk.
  • She backed the July hike but dissented in June in favor of a smaller half-point increase, citing concern the larger move could stoke policy uncertainty. Her remarks Thursday continued to tilt dovish.
  • “I think the case for continuing to raise rates remains strong. The question of how fast that has to happen is something my colleagues and I will continue to debate, but I think the direction is pretty clear,” she said in Independence, Missouri.
  • “We have done a lot, and I think we have to be very mindful that our policy decisions often operate on a lag. We have to watch carefully how that’s coming through.”
  • George also noted that the Fed was shrinking its $8.9 trillion balance sheet while raising rates, which would also help to restrain the economy. The pace of decline steps up next month to an annual pace of around $1 trillion.
  • Fed officials who have spoken since the July meeting have pushed back against any perception that they’d be pivoting away from tightening any time soon. They’ve made it clear that curbing the hottest inflation in four decades is their top priority.

 

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.

12 Aug 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and year to date flows stand at -$44.8 billion.  New issuance for the week was $3.5 billion and year to date issuance is at $74.7 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed toward the sixth straight week of gains after steadily climbing in three of the last four sessions as yields plunge to a new two-month low of 7.44%. The six-week gain would be the longest winning streak in more than 18 months.  Yields are also on track to drop for the sixth consecutive week, the longest declining stretch in two years.
  • The rally gained legs after strong jobs data last Friday and lower-than-expected consumer price index earlier this week eased fears of an imminent recession amid expectations that the Federal Reserve will slow down the rate-hike campaign from the aggressive 75bps hike in the last meeting.
  • The market appears to be discounting negative news and focusing on the positives, Brad Rogoff and Dominique Toublan at Barclays Capital wrote on Friday.
  • The gains extended across the high-yield market, with CCCs, the riskiest part of the junk bond market, poised to gain for the fourth successive week, the longest gaining streak in more than eight months. The week-to-date gains were at 1.59%, the best performing asset in the high-yield market.
  • The total returns for BBs week-to-date were 0.49% and single Bs were at 1.08%.
  • BB yields dropped below 6% to 5.99% and single B yields fell to a 10-week low of 7.64%.
  • The rally was also partly due to technical factor, with inflows into junk bond funds looking to put money to work and a lack of supply.

 

(Bloomberg)  US Inflation Runs Cooler Than Forecast, Easing Pressure on Fed

  • U.S. inflation decelerated in July by more than expected, reflecting lower energy prices, which may take some pressure off the Federal Reserve to continue aggressively hiking interest rates.
  • The consumer price index increased 8.5% from a year earlier, cooling from the 9.1% June advance that was the largest in four decades, Labor Department data showed Wednesday. Prices were unchanged from the prior month. A decline in gasoline offset increases in food and shelter costs.
  • So-called core CPI, which strips out the more volatile food and energy components, rose 0.3% from June and 5.9% from a year ago. The core and overall measures came in below forecast.
  • The data may give the Fed some breathing room, and the cooling in gas prices, as well as used cars, offers respite to consumers. But annual inflation remains high at more than 8% and food costs continue to rise, providing little relief for President Joe Biden and the Democrats ahead of midterm elections.
  • While a drop in gasoline prices is good news for Americans, their cost of living is still painfully high, forcing many to load up on credit cards and drain savings. After data last week showed still-robust labor demand and firmer wage growth, a further deceleration in inflation could take some of the urgency off the Fed to extend outsize interest-rate hikes.
  • Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.
  • Gasoline prices fell 7.7% in July, the most since April 2020, after rising 11.2% a month earlier. Utility prices fell 3.6% from June, the most since May 2009.
  • Food costs, however, climbed 10.9% from a year ago, the most since 1979. Used car prices decreased.

Shelter costs — which are the biggest services’ component and make up about a third of the overall CPI index — rose 0.5% from June and 5.7% from last year, the most since 1991. That reflected a 0.7% jump in rent of primary of residence.

05 Aug 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.3 billion and year to date flows stand at -$45.8 billion.  New issuance for the week was nil and year to date issuance is at $71.2 billion.

(Bloomberg)  High Yield Market Highlights

  • The U.S. junk bond market is headed for the fifth week of gains after steadily edging higher for seven consecutive sessions, extending the July rally after a report eased concerns of an economic slowdown. This would be the longest gaining streak since December.  The week-long US junk-bond rally spurred telecom company Charter Communications to sell new bonds to bring some life back into the dormant primary market.
  • Charter Communications rushed in to take advantage of the risk- on mood to sell bonds to fund a stock buyback, among other things. Investors, hungry for new bonds in an issuance-starved market, flooded it with orders for more than $4b for a $1b offering.
  • The bonds priced at 6.375%, the lower end of talk. Bankers, led by Morgan Stanley, increased the size of the bond sale by $500m to $1.5b.
  • The broader U.S. junk bond rally was due to a combination of factors.
  • One, easing concerns about fears of an imminent recession following economic data earlier this week. S&P Global Ratings’ US chief economist Beth Ann Bovino echoed this sentiment and wrote that while macro economic conditions deteriorated or slowed down, there were no signs of an imminent recession yet.
  • Two, investors have given their vote of confidence to the asset class as they flood US junk bonds with new cash. US high-yield funds saw an influx of over $3b for week.
  • Three, the rally comes amid expectations that after perhaps another 75bps increase in the benchmark interest rate, the Federal Reserve will slow down the aggressive campaign of hiking rates while still curbing inflation and not causing a deep recession.
  • U.S. junk bonds posted gains of 0.36% on Thursday and are on track to rally for the fifth straight week, with gains of 0.87% week-to- date.
  • Yields dropped to a new eight-week low of 7.55% and spreads at +441.
  • The gains spanned across all high-yield ratings, with CCCs posting gains of 0.65% on Thursday and is poised to be the best asset class for the week, with week-to-date returns of 1.72%.

 

(Bloomberg)  What Recession?

  • The U.S. junk bond market is forecasting that the economy may weaken, but won’t tip into a recession.
  • It comes as Federal Reserve officials vow to continue to fight inflation aggressively, even if higher rates increase the risk of recession. And some strategists and money managers think credit markets aren’t paying enough attention to how bad the potential upcoming downturn could be.
  • But for now, investors are voting with their dollars. High-yield bonds gained 5.9% in July, their biggest one-month rally in a decade, and also rose in the first three days of August, according to Bloomberg index data.
  • Risk premiums for the bonds stand at levels not usually associated with recessions. Stocks, junk bonds, and other risk markets rallied in the second half of July as investors grew more hopeful that signs of slowing growth would translate to the Fed easing up on its plans to tighten the money supply. A JPMorgan Chase model said this week that equity, credit and rates markets are together assigning a 40% probability to recession, down from 50% in June.
  • Signs of slowing growth are coming from multiple areas. Walmart last week said shoppers are avoiding big-ticket items and focusing instead on buying groceries. AT&T said some customers are delaying paying bills. Pending home sales fell in June by the most since April 2020, according to a report last week.
  • In markets, the 10-year Treasury yield was 38 basis points below the 2-year on Aug. 3, the most inverted since August 2000. Persistent inversions can signal a recession is coming. Commodities prices have broadly been falling this month, too.
  • Riskier parts of the credit spectrum are also showing some concern. CCC rated bonds, among the lowest-rated corporates, gained 4.95% in July, while BB securities, the top tier of high yield, rose 6.1% on a total return basis.
  • But it’s not clear if these signs of trouble will translate to a serious downturn.
  • “The high-yield market is definitely pricing in some level of stress, but it’s pricing in nowhere near recession-type levels,” Citigroup strategist Michael Anderson said in a phone interview.
  • Between December 1996 and December 2021, there were 28 months when the economy was in recession, according to an analysis by Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. The median junk-bond spread during those months was about 835 basis points, or 8.35 percentage points, based on ICE BofA indexes. That spread is currently closer to 454 basis points on August 3, around the median level for non-recession months, according to his analysis.