Author: Rich Balestra - Portfolio Manager

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed for their seventh week of gains, which would match the run at the end of last year, though an 11-day winning streak ended Thursday amid broad weakness in equities.
• Though high yield overall lost 0.02%, CCCs continued to rebound from their underperformance
• That riskiest part of the junk bond market returned 01% to post a 12th-consecutive gain, the longest since March
• This week’s fresh gains have followed a bevy of Fed officials acknowledging the economy is slowing and inflation is cooling
• Chicago Fed President Austan Goolsbee was the latest to suggest that the central bank may need to lower borrowing costs soon in order to avoid a sharper deterioration in the labor market
• Spreads have been range-bound despite volatility partly due to positioning, Barclays’ Brad Rogoff and Dominique Toublan wrote on Friday, but also because of expectations that the economy will remain on a good path while credit fundamentals continue to be positive
• Despite the typical summer lull, four borrowers have sold $3b of notes this week, including CCC-rated bonds

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 poised for a second-straight monthly gains, returning 0.9% so far as investors have shrugged off a hawkish Federal Reserve that’s signaled just one quarter-point cut in 2024.
• Yields have dropped eight basis points to 7.92%, while spreads widened just five basis points to 313bps as 5- and 10-year Treasury yields through Thursday had both fallen 21 basis points
• As we’ve written this week, uncertainty about the Fed’s rate outlook continued to take its toll in June on CCCs, the riskiest segment of the junk bond market
• Yields have jumped six straight sessions, the longest since January, and have surged 50bps in June to 12.87%, on track for their first three-month uptrend since October 2022
• Spreads have climbed 68bps this month to 814bps, set for the most since last October and this week hitting their widest since early February
• Still, CCCs have returned 50% so far in June
• Ba rated securities have returned 98% so far in June
• B rated securities have returned 90% so far in June
• Fed-fueled uncertainty has started keeping some high-yield borrowers on the sideline, with the primary market in June the slowest this year with almost $18b of issuance
• In the wake of the big start to the year, Barclays boosted its 2024 forecast to $280-300b from $200-230b

(Bloomberg)  Fed’s Favored Price Gauge Slows, Supporting Case for Rate Cut

• The Federal Reserve’s preferred measure of underlying US inflation decelerated in May, bolstering the case for lower interest rates later this year.
• The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.1% from the prior month. That marked the smallest advance in six months. On an unrounded basis, it was up just 0.08%, the least since November 2020.
• From a year ago, it rose 2.6%, the least since early 2021, according to Bureau of Economic Analysis data out Friday. Inflation-adjusted consumer spending posted a solid advance after a pullback in April, driven by goods and fueled in part by a jump in incomes.
• The report offers welcome news for Fed officials seeking to commence with rate cuts in the coming months, though policymakers will likely want to see additional reports like this one first. They recently dialed back their projections for rate cuts this year following worse-than-expected inflation data in the first quarter.
• “The deflation in goods prices and weakness we are starting to see at least gets us a path to a possible September cut,” said KPMG Chief Economist Diane Swonk.
• Central bankers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric increased 0.1% in May from the prior month, according to the BEA, the least since October.
• Household demand has so far remained resilient even as borrowing costs have taken a toll on some sectors of the economy. The report showed inflation-adjusted outlays for services rose 0.1%, driven by airfares and health care. Spending on merchandise advanced 0.6%, led by computer software and vehicles.

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 a third straight week of gains as investors continued to bet that the Federal Reserve will cut rates more than once this year, with retail sales data this week showing signs of consumer strain. Adding more evidence that the economy continued to slowdown, data for continuing claims, a proxy for the number of people receiving unemployment benefits, rose for a seventh straight week to 1.82m, just 1,000 shy of the highest level since the end of 2021, indicating the labor market is also cooling.
• Yields were range-bound this holiday-shortened week and are poised to decline modestly for the third consecutive week. Yields closed at 7.90% on Thursday.
• The primary market has seen a steady stream of borrowers this week. Six companies sold a little more than $3b in just three sessions
• The month-to-date volume is $14b
• The modest gains in the US junk bond market cut across all ratings, though CCC yields were set to climb for the fifth week in a row, closing at 12.54% on Thursday, the longest rising streak in more than two years
• CCCs, however, scored gains of 0.04% on Thursday, and are likely to close the week with modest gains. The week-to-date gain stand at 0.16%
• BBs are also on track for fourth week of positive returns, with week-to-date gains at 0.21%. BB yields fell five basis points week-to-date to 6.56%, also largely range bound, and may decline for the third week in a row
• US high-yield debt issuers delivered a solid first quarter with elevated earnings and generally positive guidance, JPMorgan strategists led by Nelson Jantzen wrote in note last week
• Even while credit metrics showed some modest erosion, leverage remains comfortably below the long-term average, Jantzen wrote

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 to reverse April’s losses and record modest gains for the month of May, shrugging off the supply deluge as yields held steady and spreads hovered near 300 basis points.
• The primary market was inundated with new supply amid steady and near-historic tight spreads and attractive yields. The market priced more than $31b to make it the busiest month since September 2021. Attractive all-in yields acted as the stabilization factor for credit spreads, Barclays analysts Brad Rogoff and Dominique Toublan wrote earlier this month.
• Tight spreads are here to stay amid the absence of big leveraged buyouts and corporate mergers, Rogoff and Toublan wrote in a separate report Friday morning, citing their meetings with clients at the leveraged finance conference last week
• The supply deluge saw more than $13b price in the second week of May alone, the busiest week for issuance since October 2021. Two of the five weeks priced more than $10b
• Yields were largely range-bound since the Fed meeting in early May after Fed Chair Powell indicated on May 1 that a hike in interest-rates was unlikely
• Yields advanced to near 8% last week and crossed the 8% level this week after an array of Fed speakers turned hawkish and signaled that rates are likely to stay higher for longer
• Vice Chair for Supervision Michael Barr said that policymakers need to hold interest rates steady for longer than previously thought in order to fully cool inflation
• Cleveland Fed chief Loretta Mester, speaking at a panel moderated by Atlanta Fed President Raphael Bostic, said Tuesday that she wants to see “a few more months of inflation data that looks like it’s coming down” before cutting interest rates
• Federal Reserve Bank of Minneapolis President Neel Kashkari warned that the policymakers at the Federal Reserve have not ruled out additional interest-rate increases
• Atlanta Fed President Raphael Bostic said “ we still have a ways to go” to curb the significant price growth seen over the last few years
• Yields on the broad US junk bond index were down 3 bps for the month, though they climbed above 8% after staying in the range of 7.80%-7.90%
• BB yields dropped 12 basis points for the month to 6.77% after falling to 6.56% in the middle of the month, driving gains of 0.99% for May
• But CCC yields surged to a four-month high of 12.49%, rising 21 basis points month-to-date. Still, CCCs amassed gains of 0.32% for the month
• Single B yields fell 12 basis points to 7.84% and spreads were below 300 basis points, pushing gains of 0.76% for the months

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 barely finished higher Thursday, the third time this week that’s been the case, but the market has yet to fall this week and is poised for its third up week in the past four.
• An array of economic data this week signaled a slow start to 2Q for the US economy, spurring speculation Federal Reserve policymakers may gain confidence about starting to cut rates. The minutes for the latest FOMC meeting are due May 22.
• The data have helped fuel risk-on sentiment, with equities briefly reaching record highs, and push down Treasury yields about 10 basis points this week.
• CCCs have returned 0.44% so far this week with a yield of 12.27%.
• BB yields have fallen 10 basis points to at a near-seven-week low of 6.57% while posting similar returns to CCCs.
• Single B yields have dropped even more, 17 basis points to 7.55%, and returned 0.35% so far this week.
• Issuance has slowed following last week’s bounty, with six borrowers selling more than $3b of new notes this week.
• This week’s lighter supply helped bolster this week’s returns.
• Barclays on Friday revised its year-end spread forecast for high yield to 295-315 basis points, implying total returns of 5%-5.5%.

(Bloomberg)  US Inflation Ebbs for First Time in Six Months in Relief for Fed

• A measure of underlying US inflation cooled in April for the first time in six months, a small step in the right direction for Federal Reserve officials looking to start cutting interest rates this year.
• The so-called core consumer price index — which excludes food and energy costs — climbed 0.3% from March, snapping a streak of three above-forecast readings which spurred concern that inflation was becoming entrenched. The year-over-year measure cooled to the slowest pace in three years, Bureau of Labor Statistics figures showed.
• The Fed is trying to rein in price pressures by weakening demand across the economy. Another report out Wednesday showed retail sales stagnated in April, indicating high borrowing costs and mounting debt are encouraging greater prudence among consumers.
• While the figures may offer the Fed some hope that inflation is resuming its downward trend, officials will want to see additional readings to gain the confidence they need to start thinking about cutting interest rates. Chair Jerome Powell said Tuesday the central bank will “need to be patient and let restrictive policy do its work,” and some policymakers don’t expect to cut rates at all this year.
• “It does open the door to a potential rate cut later in the year,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “It will take a few more readings indicating that inflation is coming down for the Fed to act.”
• Traders boosted the odds of a September rate cut to about 60%.
• Core CPI over the past three months increased an annualized 4.1%, the smallest since the start of the year.
• Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.3% from the prior month and 3.4% from a year ago. Shelter and gasoline accounted for over 70% of the increase, the BLS said in the report.
• Additionally, the advance in the CPI was driven once again by services like car insurance and medical care.
• Shelter prices, which is the largest category within services, climbed 0.4% for a third month. Owners’ equivalent rent — a subset of shelter, which is the biggest individual component of the CPI — rose by a similar amount. Robust housing costs are a key reason why inflation not only in the US, but also in many other developed economies has refused to ebb.
• The personal consumption expenditures price index, doesn’t put as much weight on shelter as the CPI does. That’s part of the reason why the PCE is trending closer to the Fed’s 2% target.
• A report Tuesday showed producer prices rose in April by more than projected, but key categories that feed into the PCE were more muted. Combined with CPI components that also inform the PCE calculation, economists expect that measure to come in softer when April data is released later 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

• Weekly US junk-bond supply rose to almost $13 billion, making it the busiest week for new bond sales since the week ended Oct. 1, 2021.
• The supply spurt came after junk bonds racked up the strongest weekly returns since December on expectations that the Federal Reserve may begin to lower interest rates by the end of third quarter as inflation slows while the economy stays resilient.
• The cascade of new issuance drove the month’s tally to more than $14b in just seven sessions, more than 63% of the full month of May 2023 with three full weeks still to go. Month-to-date volume is up by 59% versus the comparable period a year ago
• Five companies sold nearly $2b Thursday to take the week’s volume to $12.8b. For the week, 18 borrowers came to market
• The recent rally stalled after a three-day gaining streak and is poised to close the week with modest gains after strong returns last week
• Though the rally faded across ratings, US borrowers capitalized on the strong risk appetite with spreads around 300 basis points and yields holding steady below 8% in the context of a strong and resilient economy
• CCC yields closed at 12.14% and spreads at 723 basis points, up six and seven basis points, respectively, this week so far pushing week-to-date loss to -0.21% and ending the two-week gaining stretch
• Demand for credit remained robust and investors absorbed the higher-than-expected issuance with limited effects on the secondary market, Brad Rogoff and Dominique Toublan of Barlcays wrote Friday

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 gained for the second session in a row, pushing yields down 10 basis points to a three-week low after Fed Chair Powell indicated on Wednesday that a hike in interest-rates was unlikely. However, he also suggested that higher-than-expected inflation readings have reduced the central bank’s confidence that price pressures are easing.
• The US high-yield market is headed toward a second week of positive returns, partly fueled by Chair Powell’s reiteration that the Fed is not mulling a hike in rates, while also expressing hopes that rate cuts could happen later in the year.
• The broader junk bond index yields dropped to 8.01% , falling 12 basis points week-to-date, the second straight week of decline
• BBs notched up gains of 0.37% on Thursday, the strongest one-day returns since December and on track for a second consecutive week of gains. The week-to-date advance is 0.56%, the most in six weeks
• BB yields dropped nine basis points on Thursday to 6.77%, and 11 basis points week-to-date
• Single B yields also slid 11 basis points week-to-date to 7.85%, driving gains of 0.49%
• CCC yields fell 19 basis points on Thursday to 12.29% and 13 basis points week-to-date. Tumbling yields drove gains of 0.44% in the first four days
• The primary market resumed normal business after the Fed meeting, pricing $1.3b on Thursday amid strong economic data, attractive all-in yields and tight spreads

(Bloomberg) US Jobs Post Smallest Gain in Six Months as Unemployment Rises

• US employers scaled back hiring in April and the unemployment rate unexpectedly rose, suggesting some cooling is underway in the labor market after a strong start to the year.
• Nonfarm payrolls advanced 175,000 last month, the smallest gain in six months, a Bureau of Labor Statistics report showed Friday. The unemployment rate ticked up to 3.9% and wage gains slowed.
• Friday’s report signaled further evidence that demand for workers is moderating, but the data likely don’t amount to “an unexpected weakening” that Federal Reserve Chair Jerome Powell said would warrant a policy response.
• After holding interest rates steady for a sixth straight meeting this week, Powell said he thinks policy is restrictive as seen by weaker demand for labor, though it still exceeds the supply of available workers. As inflation has largely receded from its 2022 peak, officials are now also focused on ensuring maximum employment, he said Wednesday.
• Treasury yields and the dollar fell, while stock futures rose after the report.
• Aggregate weekly payrolls, a broad measure of employment, hours and earnings, were unchanged from a month earlier. That snapped three straight years of monthly advances and, if sustained, raises the risk of a downshift in consumer demand.
• The very gradual cooling in hiring and wage growth is part of the reason why policymakers have indicated they’re in no rush to bring interest rates down from a two-decade high.
• The participation rate — the share of the population that is working or looking for work — held steady at 62.7%. The rate for workers aged 25-54 ticked up to 83.5%, matching the highest level in two decades. Increased participation will help to restrain wage growth.

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 extended their decline Thursday, logging their biggest one-day loss in the more than a week as slowed economic growth and a higher inflation rating curbed soft-landing hopes.
• Yields jumped 10 basis points to 8.21%, though they still remain lower for the week
• Ahead of today’s PCE reading, the inflation component in the 1Q GDP report fueled worries the Federal Reserve may further delay rate cuts to late this year
• BB yields climbed 8 basis points to 6.96% as such notes lost27%
• Single B yields jumped 12bps to 8.03%, with a loss of 0.3%
• CCCs also lost 0.3%, though yields rose just 3bps to 12.55%
• Tight spreads against the backdrop of a resilient economy continues to draw new bond sales
• This month’s supply is at $24b, up 28% from the full month of April 2023

(Bloomberg)  US Economy Slows and Inflation Jumps, Damping Soft-Landing Hopes

• US economic growth slid to an almost two-year low last quarter while inflation jumped to uncomfortable levels, interrupting a run of strong demand and muted price pressures that had fueled optimism for a soft landing.
• Gross domestic product increased at a 1.6% annualized rate, below all economists’ forecasts, the government’s initial estimate showed. The economy’s main growth engine — personal spending — rose at a slower-than-forecast 2.5% pace. A wider trade deficit subtracted the most from growth since 2022.
• A closely watched measure of underlying inflation advanced at a greater-than-expected 3.7% clip, the first quarterly acceleration in a year, the Bureau of Economic Analysis report showed Thursday.
• The figures represent a notable loss of momentum at the start of 2024 after the economy wrapped up a surprisingly strong year. With the inflation pickup, Federal Reserve policymakers — who were already expected to hold interest rates at a two-decade high when they meet next week — may face renewed pressure to further delay any cuts and even to consider whether borrowing costs are high enough.
• “The hot inflation print is the real story in this report,” Olu Sonola, head of US economic research at Fitch Ratings, said in a note. “If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach.”
• The first-quarter pickup in inflation was driven by a 5.1% jump in service-sector inflation that excludes housing and energy, nearly double the prior quarter’s pace.
• Stripping out inventories, government spending and trade, inflation-adjusted final sales to private domestic purchasers — a key gauge of underlying demand — rose at a 3.1% rate.
• The GDP report showed outlays for services rose by the most since the third quarter of 2021, fueled by health care and financial services. Spending on goods decreased for the first time in more than a year, restrained by motor vehicles and gasoline.
• At next week’s Fed meeting, traders will parse Chair Jerome Powell’s comments for clues about the latest thinking around easing policy.

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 the third weekly loss — and the biggest since January — as yields soar to a more than four-month high on geopolitical tensions and concerns about interest rates staying higher for longer and stubborn inflation. Yields, which have risen for seven straight sessions, are at 8.30% and spreads widened to 325 basis points.
• Rising yields and widening spreads against the backdrop of strong data and decent corporate earnings have fueled supply. The primary market has seen more than $8b priced this week
• Month-to-date supply stands at $21b and year-to-date volume to $106b
• The primary market seemed resilient even after Federal Reserve Chair Jerome Powell signaled that the Fed will wait longer than previously anticipated to cut interest rates after a series of surprisingly high inflation readings
• The market also shrugged off geopolitical conflicts on expectations that diplomacy will prevail and escalation would be stopped in its tracks
• Losses spanned across ratings. CCC yields approached 13%, a four-month high, after advancing 50 basis points week-to-date. Yields have risen for seven days in a row, the longest rising stretch in more than a year. Spreads jumped to an eight-week high of 786 basis points
• CCCs suffered losses for the seventh consecutive session and are headed toward the third week of losses. Week-to-date losses stood at 1.06%, the most in a week since early January

(Bloomberg)  Bond Funds Dangling 5% Yields Lure Cash to Active Managers

• About $90 billion flowed into active bond funds in the first quarter, the most for any three-month period since mid-2021. With yields now at their highest in almost two decades, fund managers see a window of opportunity for investors to lock in outsize returns before the Federal Reserve fulfills its promise to cut rates.
• The fresh inflows mark the start of “a longer multi-quarter and potentially multi-year trend out of cash,” said Ryan Murphy, head of fixed-income business development at Capital Group, the Los Angeles-based bond colossus. While many investors are still cautiously favoring cash, the rising payouts on debt securities should encourage more to shift their money into bonds, according to Murphy. “Investors are getting the best compensation on fixed income in 20 years,” Murphy said.
• While the sums are substantial, the real prize for bond managers is getting investors to shift out of money-market funds, which had been holding more than $6 trillion. It’s dropping now — the latest data Thursday showed the largest weekly decline in short-term cash holdings since September 2008.
• Bond buying right now is a tricky calculus for individual investors, in part because the timing and number of rate cuts keeps getting pushed back, with the latest delay signaled by Fed Chair Jerome Powell in an April 16 discussion. It also takes no small effort to sort through distorted bond prices and credit quality to find real opportunities.
• All of that favors active managers. “The big picture is that yields are attractive and you need to be an active manager in this environment,” Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, said in an interview last 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.