Author: Rich Balestra - Portfolio Manager

24 Jun 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$3.4 billion and year to date flows stand at -$44.0 billion.  New issuance for the week was $0.9 billion and year to date issuance is at $68.9 billion.


(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed toward the fourth straight weekly loss as investors pull cash out of high-yield funds amid growing concerns that the economy is headed toward a recession. Yields are hovering near a two-year high of 8.56% and spreads at a 21-month high of +525bps.  Barclays Plc’s Brad Rogoff said in a note Friday that high inflation will likely cause the fundamentals supporting the high-yield market to “deteriorate,” putting pressure on “lower-margin or more-leveraged companies.”
  • “The average weighted debt to EBITDA leverage for CCCs is 10.5 times, with 1.8x interest cover indicating unsustainable capital structures over the next two years,” S&P Global wrote on Thursday. CCC yields were close to breaching the 13% level and spreads were near distressed levels, closing at +966bps as tightening financial conditions fuel worries about default risk.
  • U.S. high yield funds saw an outflow for week.
  • The junk bond primary market was virtually nonexistent amid rising yields and fears of slowing economic growth. Month-to-date issuance is at a modest $9.25b, making it the slowest June in more than a decade.
  • JPMorgan revised its junk-bond supply forecast for 2022 to $175b from the earlier estimate of $425b made in November.



(Bloomberg)  Powell Says Soft Landing ‘Very Challenging,’ Recession Possible

  • Federal Reserve Chair Jerome Powell gave his most explicit acknowledgment to date that steep rate hikes could tip the US economy into recession, saying one is possible and calling a soft landing “very challenging.”
  • “The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy,” Powell told lawmakers on Wednesday. “We can’t fail on that task. We have to get back to 2% inflation.”
  • The Fed chair was testifying before the Senate Banking Committee during the first of two days of congressional hearings. In his opening remarks, Powell said that officials “anticipate that ongoing rate increases will be appropriate,” to cool the hottest price pressures in 40 years.
  • “Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook,” he said.
  • Powell’s remarks reinforced comments at a press conference last week after he and his colleagues on the Federal Open Market Committee raised their benchmark lending rate 75 basis points — the biggest increase since 1994 — to a range of 1.5% to 1.75%.
  • “We understand the hardship high inflation is causing,” Powell said Wednesday. “We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so.”
  • “Financial conditions have tightened and priced in a string of rate increases and that’s appropriate,” Powell said in response to a question following his opening remarks. “We need to go ahead and have them.”
  • The Labor Department’s consumer price index rose 8.6% last month from a year earlier, a four-decade high. University of Michigan data showed US households expect inflation of 3.3% over the next five to 10 years, the most since 2008 and up from 3% in May.
  • The rising cost of living has angered Americans and hurt the standing of President Joe Biden’s Democrats with voters ahead of November congressional midterm elections.
  • Fed officials have admitted that they were too slow to tighten and are now trying to front-load rate increases in the most aggressive policy pivot in decades.
  • While a recession isn’t in the Fed’s forecast, economists are increasingly flagging the likelihood of a downturn sometime in the next two years.
  • Former New York Fed President Bill Dudley said in a Bloomberg Opinion column Wednesday that a recession is “inevitable” within the next 12 to 18 months. An economist at the Fed, Michael Kiley, said in a paper Tuesday that the risk of a large increase in the unemployment rate is above 50% over the next four quarters, based on a simulation incorporating inflation data, unemployment, corporate bond yields and Treasury yields.
  • While he said that he did not see the likelihood of a recession as particularly elevated right now, he said that it was “certainly a possibility. It is not our intended outcome at all,” noting that events in the last few months have made it harder for the Fed to lower inflation while sustaining a strong labor market.
  • A soft landing “is our goal. It is going to be very challenging. It has been made significantly more challenging by the events of the last few months — thinking there of the war and of commodities prices and further problems with supply chains.”
  • “The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply,” he said.
  • Policy makers’ latest forecasts, released last week, show the level of rates roughly doubling in the second half of the year to a target range of 3.25% to 3.5%. They saw rates peaking next year at 3.8%.
  • Officials have also begun shrinking their massive balance sheet. The combined impact of higher borrowing costs and so-called quantitative tightening is expected to come at some cost to jobs.
  • Unemployment was near a 50-year low of 3.6% last month and Fed officials forecast it rising to 4.1% by the end of 2024, when they see rates peaking at 3.8%. Inflation was projected to decline toward their 2% goal by then from current readings of more than three times that level, according to the gauge that the Fed targets.
17 Jun 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$6.4 billion and year to date flows stand at -$40.6 billion.  New issuance for the week was $2.7 billion and year to date issuance is at $68.0 billion.


(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed toward the biggest weekly loss in more than two years as yields jump to a 26-month high of 8.56% amid fears that the 75 basis points hike in interest rates by the Federal Reserve, the biggest since 1994, could trigger a recession.
  • High-frequency credit card data shows that consumer spending growth has started to fade, suggesting more weakness in risk assets, Brad Rogoff of Barclays wrote on Friday.
  • With the Federal Reserve focused on inflation and willing to take collateral risk, downside risk worsens, Barclays wrote.
  • However, high yield will trade in the +450 to +475bps range, despite periods of overshooting, Barclays’ analysts wrote.
  • The spreads breached the +500 mark to close at +508bps, the widest since November 2020 amid a broader risk-off move.
  • The losses spanned across high-yield ratings amid growing concern that a recession could fuel a rapid increase in credit risk.
  • CCCs, the riskiest of junk bonds, are also expected to see the most weekly loss since April 2020, with week-to-date losses at 3.01%.
  • CCC yields rose to 12.88%, the highest since May 2020.
  • The broader junk bond index is on track to post losses for the third straight week, with week-to-date losses at 3.09%, the most in a week since March 2020.
  • The steady risk aversion was becoming evident in the primary market with several new issues pricing at a steep discount.
  • The primary market was fairly quiet this week. The month-to-date tally stood at $9.3b, down 63% from comparable period last year.
  • Junk bonds will wait and watch as US equity futures rebound cautiously along with stocks in Europe after a rout triggered by fears of an economic downturn as major central banks close the liquidity taps.


(Bloomberg)  Powell Sets Path to Restrain Economy and Stop Runaway Inflation

  • Federal Reserve Chair Jerome Powell took a step toward assuming the mantle of inflation slayer Paul Volcker, all but acknowledging that reining in run-away price pressures may result in a recession.
  • Declaring that it’s essential to bring inflation down, Powell engineered the central bank’s biggest interest-rate increase since 1994 on Wednesday and held out the distinct possibility of another jumbo three-quarter percentage point increase in July.
  • He openly endorsed for the first time raising rates well into restrictive territory with the aim of cooling off the labor market and pushing joblessness up — a strategy that in the past has often resulted in an economic downturn.
  • “This is a Volcker-esque Fed,” said Diane Swonk, chief economist at Grant Thornton LLP. “That means the Fed is willing to take a rise in unemployment and a recession to avert a repeat of mistakes of the 1970s. Supply shocks won’t correct themselves, so the Fed must reduce demand to meet a supply constrained world.”
  • The shift in stance carries perils not only for the economy, but for financial markets and President Joe Biden. Stocks have tumbled in recent months as the Fed has tightened credit to get on top of inflationary pressures that have proved more persistent and widespread than it expected.
  • Biden has seen his popularity plunge as inflation has soared. A recession — and the higher unemployment that would bring — would rob the president of one of his few talking points in touting the benefits of his policies for the economy.
  • An increasing number of economists are projecting a downturn next year as the Fed struggles to get on top of inflation that’s running at its highest level in four decades. Nearly 70% of academic economists polled by the Financial Times and the University of Chicago foresee a contraction in gross domestic product next year, according to survey released June 13.
  • Fed policy makers’ projections released after the meeting show the economy continuing to grow this year and next, though at a subpar pace. But they also foresee unemployment rising, something that usually only happens during a recession: Joblessness is forecast to rise to 4.1% at the end of 2024 from 3.6% now, according to the median forecast.
  • While maintaining that a 4.1% jobless rate would still be historically low, Powell made clear that the Fed’s No. 1 goal was not tending to the labor market but getting inflation under wraps.
  • “I will begin with one overarching message,” the Fed chair said at the start of his press conference. “We’re strongly committed to bringing inflation back down, and we’re moving expeditiously to do so.”
  • To that end, policy makers are projecting a steep rise in interest rates in coming months. They now see the federal funds rate they control rising to 3.4% by the end of this year and 3.8% at the end of 2023. That’s well above the 2.5% rate they reckon is neutral for the economy — neither spurring nor restricting growth — and compares with the current fund’s rate target of 1.5% to 1.75%.
10 Jun 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.4 billion and year to date flows stand at -$36.1 billion.  New issuance for the week was $1.3 billion and year to date issuance is at $65.2 billion.


(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed toward the biggest weekly loss in two months after declining for five straight sessions, the longest losing streak in almost two months, as the Fed-fueled rally faded amid concerns that hawkish monetary action may precipitate an economic recession.
  • Inflows into junk-bond funds have moderated, signaling investors are turning more cautious with the rally waning steadily amid fears of an imminent recession.
  • Weekly losses spanned across all high yield ratings. BBs are also on track to post the biggest weekly loss in two months. The loss follows a decline in eight consecutive sessions, the longest losing streak since February.
  • BBs are the worst performers week-to-date with losses of 1.46%.
  • CCC yields rose to 11.62%. The index is poised to the best performing asset in the high yield market, with modest losses of 0.83% week-to-date.


(Bloomberg)  Yellen Warns Inflation to Stay High, Recants Again on Transitory

  • Treasury Secretary Janet Yellen told US lawmakers peppering her Tuesday with questions about the surge in the cost of living that inflation is likely to stay high and that she ought not to have termed big price increases as “transitory” last year.
  • Yellen, in a Senate Finance Committee hearing, continued to defend President Joe Biden’s $1.9 trillion American Rescue Plan, which Republicans have blamed for helping drive inflation to a four-decade high.
  • “Senator, we’re seeing high inflation in almost all developed countries around the world, and they have very different fiscal policies,” Yellen said in response to Montana Republican Steve Daines. “It can’t be the case that the bulk of the inflation we’re experiencing reflects the impact of the ARP.”
  • She acknowledged once again that both she and Federal Reserve Chair Jerome Powell erred in 2021 by forecasting that high inflation wouldn’t persist.
  • “Both of us probably could have used a better term than ‘transitory,’” she said.
  • “There’s no question that we have huge inflation pressures, that inflation is really our top economic problem at this point and that it’s critical we address it,” she added. “I do expect inflation to remain high although I very much hope that it will be coming down.”
  • Lawmakers from both sides of the aisle highlighted their own concerns with inflation, ahead of midterm congressional elections in November where Democrats will be challenged to retain their control.
  • Yellen, along with Democratic senators, highlighted proposals to help address living costs through measures including lowering prescription drug costs. Republicans attacked Yellen for wanting yet more spending even after the ARP had fueled price gains.
  • The Treasury chief repeated her view that unexpected shocks, including Russia’s invasion of Ukraine, were not predictable and contributed significantly to the inflation Americans continue to experience.
  • The hearing was on Biden’s 2023 budget proposal. Yellen told lawmakers that the plan would complement the Fed’s efforts to rein in inflation by enacting programs that would help contain costs for Americans on energy, health care and pharmaceuticals. Deficit reduction would also help, she said.


(Bloomberg)  US Inflation Quickens to 40-Year High, Pressuring Fed and Biden

  • U.S. inflation accelerated to a fresh 40-year high in May, a sign that price pressures are becoming entrenched in the economy. That will likely push the Federal Reserve to extend an aggressive series of interest-rate hikes and adds to political problems for the White House and Democrats.
  • The consumer price index increased 8.6% from a year earlier in a broad-based advance, Labor Department data showed Friday. The widely followed inflation gauge rose 1% from a month earlier, topping all estimates. Shelter, food and gas were the largest contributors.
  • The so-called core CPI, which strips out the more volatile food and energy components, rose 0.6% from the prior month and 6% from a year ago, also above forecasts.
  • The figures dash any hope that inflation had already peaked and was starting to ebb. Record gasoline prices, paired with unrelenting food and shelter costs, are adding strain to Americans’ cost of living, suggesting the Fed will have to pump the brakes on the economy even harder. That raises the risk of a recession.
  • “There’s little respite from four-decade high inflation until energy and food costs simmer down and excess demand pressures abate in response to tighter monetary policy,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note.
  • In May, prices for necessities continued to rise at double-digit paces. Energy prices climbed 34.6% from a year earlier, the most since 2005, including a nearly 49% jump in gasoline costs. Gas prices so far in June have climbed to new highs, signaling more upward pressure in coming CPI reports and therefore keeping the Fed in the hot seat.
  • Grocery prices rose 11.9% annually, the most since 1979, while electricity increased 12%, the most since August 2006. Rent of primary of residence climbed 5.2% from a year earlier, the most since 1987.
  • “Tighter monetary policy will not help much with surging global commodity prices or structural changes in the way people spend and live in the post-pandemic economy,” Wells Fargo & Co. economists Sarah House and Michael Pugliese said in a note.
  • That likely spells further trouble for President Joe Biden, whose approval ratings have sunk to new lows ahead of midterm elections later this year. While the job market remains a bright spot, decades-high inflation is crippling confidence among the American people and largely outpacing wage gains.
03 Jun 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.6 billion and year to date flows stand at -$36.6 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $63.9 billion.


(Bloomberg)  High Yield Market Highlights 

  • The U.S. junk bond rally is steadily fading as it is heads toward a modest weekly gain of 0.04%, a big drop from the biggest weekly jump in more than two years in the previous week with returns of more than 3%. The junk bond primary market saw a flurry of new issuance in recent days from a stream of borrowers, the busiest week since mid-January.
  • High yield issuers “testing market access in the coming weeks should provide better visibility on clearing levels and potentially induce further repricing in secondary spreads,” Morgan Stanley analysts led by Srikanth Sankaran wrote on Thursday.
  • The recent rally is more a “reflection of credit markets still trying to calibrate growth fears and tighter liquidity,” Morgan Stanley wrote.
  • The borrowers rushed to take quick advantage of the rally unleashed last week after the release of the Fed minutes signaled that the central bank may slow its monetary tightening after the expected half-percentage-point rate increases at each of the next two meetings.
  • After a big surge of issuance on Wednesday pricing more than $4b to make it the busiest in five weeks, there was a marked slowdown after that. Thursday was quiet with just one deal pricing for $500m and there is nothing scheduled for pricing today.
  • While the primary market was revived after a quiet and slowest May since 2002, the market was led by low risk BB rated bonds as the borrowers were testing access and risk appetite of the market.
  • The spreads have tightened too fast, Barclays wrote on Friday. The credit cycle is aging quickly, and the macro picture remains gloomy in both the US and the rest of the world, Brad Rogoff, head of fixed income research at Barclays, wrote in note.
  • “We expect volatility to remain elevated as the Fed tries to find the right balance,” Barclays emphasized.
  • The sharp surge and sudden drop in yields and prices will continue until clarity emerges from the Federal Reserve on the right balance.
  • Junk bonds may stall as US equity futures drop after a report that Tesla Inc. Chief Executive Officer Elon Musk said the electric carmaker needs to cut staff amid a gloomy economic outlook. Meanwhile, oil is headed for a sixth weekly advance after a keenly anticipated OPEC+ meeting delivered only a modest increase in output.


(Bloomberg)  Fed Starts Experiment of Letting $8.9 Trillion Portfolio Shrink

  • The Federal Reserve is about to start shrinking its $8.9 trillion balance sheet, deploying a second tool along side higher interest rates to curb inflation, though officials don’t know just how effective it will be.
  • After doubling in size through asset purchases in the first two years of the pandemic, the balance sheet will be reduced at a pace that’s almost twice as fast as after the last financial crisis. While the process officially commences on Wednesday, the first US Treasury securities won’t run off until $15 billion mature on June 15.
  • The Fed is capping monthly runoff at $47.5 billion — $30 billion for Treasuries and $17.5 billion for mortgage-backed securities — until September. Those thresholds will then double to a combined $95 billion. That compares to a peak of $50 billion a month when the Fed performed the exercise starting in 2017.
  • Officials say the reduction will work in tandem with interest-rate increases to cool price pressures by tightening financial conditions. But it’s not clear how much impact the balance sheet will have. As Fed Governor Christopher Waller put it in a speech on Monday, estimates “using a variety of models and assumptions” are “highly uncertain.”
  • The Fed deployed massive asset purchases during the 2008 financial crisis for the first time since World War II, expanding the balance sheet to about $4.5 trillion by the time it stopped buying at the end of 2014. It then waited three years before allowing it to begin shrinking at the end of 2017, reducing it to about $3.8 trillion by September 2019.
  • Uncertainty over the course of the balance sheet was said by commentators to have contributed to the market turmoil that ultimately helped bring an end to the Fed’s last rate-hike campaign, which concluded in December 2018. Now, the Fed is also raising its benchmark rate at a faster pace in a bid to tighten financial conditions and tame inflation, which in recent months has reached the highest levels in four decades.
  • Minutes of the Fed’s most recent policy meeting, on May 3-4, said that, “Regarding risks related to the balance-sheet reduction, several participants noted the potential for unanticipated effects on financial market conditions.” The next meeting is scheduled for June 14-15.
13 May 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.1 billion and year to date flows stand at -$35.8 billion.  New issuance for the week was $1.2 billion and year to date issuance is at $56.9 billion.

 (Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed for the biggest loss in five weeks as yields veer toward a fresh two-year high of 7.62% and spreads to an 18-month high of +458bps. It will mark the sixth straight weekly loss, the longest losing streak since December 2015. The losses spanned the ratings spectrum. CCC-grade bonds, the riskiest part of the market, are expected to post a loss of almost 3% for the week, the worst in the high yield market.
  • The downturn was primarily driven by rate fears that were fueled by US inflation data that bolstered the case for more aggressive monetary tightening by the Federal Reserve. That also sparked fears that the Fed may not be able to contain inflation without causing a recession, which would increase the risk of default by shaky borrowers.
  • “The macroeconomic outlook has deteriorated rather swiftly, and growth expectations have continued to decline,” Brad Rogoff, head of global fixed income research at Barclays, wrote on Friday.
  • The primary market continued to remain generally frozen amid rising cost of debt, fueled by uncertainty over the Fed and the economic outlook.
  • New bond sales volume has plunged, with year-to-date sales at $56.9b, a 75% drop from a year earlier and the lowest for the period since 2009.



(Bloomberg)  Powell Wins Senate Confirmation for Second Term as Fed Chair

  • The Senate voted to confirm Jerome Powell for a second four-year term as Federal Reserve chair on Thursday, trusting him to tackle the highest inflation to confront the country in decades.
  • The overwhelmingly bipartisan 80-19 vote comes as the Fed grapples with soaring prices amid criticism it was slow to act against a threat that’s angered Americans and hammered President Joe Biden’s popularity.
  • Powell’s Fed began raising interest rates in March and says it will keep going until price pressures cool, seeking a soft landing that doesn’t crash the economy. But critics doubt the central bank can avoid a recession as it tightens monetary policy that had been eased dramatically during the pandemic.
  • “Few institutions are more important to help steer our economy in the right direction and to fight inflation than the Fed,” Senate Majority Leader Chuck Schumer said on the Senate floor earlier in the day. “Chairman Powell presided as Fed chair during some of the most challenging moments in modern American history.”
  • Powell, 69, is Biden’s fourth Fed nominee to win confirmation. Economist Philip Jefferson was confirmed with bipartisan support on Wednesday. Lisa Cook, who was opposed by Republicans, won confirmation by the narrowest margin on Tuesday with Vice President Kamala Harris providing the tie-breaking vote. Lael Brainard was confirmed as Fed vice chair last month.
  • Powell, a Republican nominated for Fed jobs by both Democrat Barack Obama and Republican Donald Trump, is a former Carlyle Group partner and worked as a Treasury official during the administration of George H.W. Bush. He earned a law degree from Georgetown University, making him a rare non-economist to lead the Fed in recent decades.
  • Powell had near-unanimous backing in the Senate Banking Committee. Only Massachusetts Democrat Elizabeth Warren opposed him there, saying his record on deregulating financial institutions made him dangerous.
11 Apr 2022

2022 Q1 High Yield Quarterly

In the first quarter of 2022, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was ‐4.84% while the CAM High Yield Composite net of fees total return was ‐ 6.11%. The S&P 500 stock index return was ‐4.60% (including dividends reinvested) over the same period. The 10 year US Treasury rate (“10 year”) had a steady upward move as the rate finished at 2.34%, up 0.83% from the beginning of the quarter.  During the quarter, the Index option adjusted spread (“OAS”) widened 42 basis points moving from 283 basis points to 325 basis points. Each quality segment of the High Yield Market participated in the spread widening as BB rated securities widened 38 basis points, B rated securities widened 29 basis points, and CCC rated securities widened 76 basis points. Take a look at the chart below from Bloomberg to see a visual of the spread moves in the Index over the past five years.

The Energy, Other Financial, and REITs sectors were the best performers during the quarter, posting returns of ‐2.54%, ‐2.73%, and ‐3.82%, respectively. On the other hand, Banking, Communications, and Utilities were the worst performing sectors, posting returns of ‐7.27%, ‐6.54%, and ‐5.71%, respectively. Clearly the market was weak as all sectors posted a negative return in the period. At the industry level, oil field services, independent energy, and leisure all posted the best returns. The oil field services industry posted the highest return 3.05%. The lowest performing industries during the quarter were wireless, food and beverage, and banking. The wireless industry posted the lowest return ‐11.79%.

The energy sector has been quite topical. Crude oil had a $45 per barrel range in Q1 and averaged $92 per barrel. Meanwhile, the natural gas market also moved steadily higher during the quarter reaching highs not seen in nine years. OPEC+ members are “refusing to deviate from their schedule  of  gradual production increases.”i They are also refusing to discuss the Russia‐Ukraine conflict with the last few meetings lasting less than fifteen minutes. Russia is a significant member of the broader group. Therefore, there likely needs to be much more political wrangling before the group takes a stand against one of their own.

During the first quarter, the high yield primary market finally took a break after three years of strong issuance. The weak market led by rising rates kept companies on the sidelines as only $45.8 billion posted in the quarter. Consumer Discretionary did continue to lead and took 33% of the market share. Second place was Materials at 12% of the total. Wall Street strategists have begun to lower their full year issuance forecasts. However, there isn’t much concern for lack of capital access due to issuers being so proactive with refinancing in the past few years.

The Federal Reserve did lift the Target Rate by 0.25% at their March meeting. That was the first increase since 2018. The chart to the left shows the updated Fed dot plot post the March meeting. Of note, the Fed median Target Rate for 2022 increased from 0.875 to 1.875. Such movement is a clear indication of the dynamic economic backdrop. Furthering the point, Fed Chair Jerome  Powell  commented just days after the March meeting, “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”ii He then went on to say, “And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.” These moves are being driven by a tight employment market and inflation that is running higher than any point in the last 40 years. The Fed is undoubtedly looking to bring inflation lower while keeping the economy at some sustainable growth rate.

Intermediate Treasuries increased 83 basis points over the quarter, as the 10‐year Treasury yield was at 1.51% on December 31st, and 2.34% at the end of the first quarter. The 5‐year Treasury increased 120 basis points over the quarter, moving from 1.26% on December 31st, to 2.46% at the end of the first 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 fourth quarter GDP print was 6.9% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2022 around 3.4% with inflation expectations around 6.2%.iii Worth mentioning is the yield curve inverting for the first time since 2019. Historically, inversion is an indication of pessimism in the growth outlook and concern of a nearing recession. The recent reports have been split between “the sky is falling” and “this time is different,” neither of which seems all that compelling at the present moment. Perhaps a more appropriate view is one attributed to Barclays. They suggest looking at the current environment in terms of recession probabilities. Based on their model, recession probabilities are not elevated coming in at roughly 20%. This is leading them to currently have the view that inflation is likely to brake rather than break the growth outlook.

Being a more conservative asset manager, Cincinnati Asset Management Inc. does not buy CCC and lower rated securities. This policy generally served our clients well in 2020. However, the lowest rated segment of the market outperformed during 2021. Thus, our higher quality orientation was not optimal last year.

That higher quality focus continued to have a tough time against the rising rate environment during Q1, as it is the most rate sensitive group within the broader high yield market. As a result and noted above, our High Yield Composite net of fees total return did underperform the Index in Q1. The higher quality positioning was the sizeable negative contributor relative to the Index, slightly offset by the cash position in an overall negative total return market.

The Bloomberg Barclays US Corporate High Yield Index ended the first quarter with a yield of 6.01%. The market yield is an average that is barbelled by the CCC rated cohort yielding 9.06% and a BB rated slice yielding 5.00%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), had an average of 25 over the quarter with a spike to a high of 36 as the market sold off during the first two and a half months of the year.

For context, the average was 15 over the course of 2019, 29 for 2020, and 19 for 2021. The first quarter had two bond issuers default on their debt. The trailing twelve month default rate fell to 0.23%. The current default rate is relative to the 4.80%, 1.63%, 0.92%, 0.27% default rates from the previous four quarter end data points listed oldest to most recent. The fundamentals of high yield companies are in great shape as leverage, profit margins, and debt servicing all look good. From a technical view, fund flows were negative in all three months of the quarter. The 2022 year‐to‐date outflow stands at $28.5 billion.iv 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 any price volatility, without default, par will be paid at the stated maturity date. Currently, defaults are at historic lows and fundamentals are at highs. Further, as the quarter closed, the market saw a weekly inflow, only the second of the year. Additionally, market returns coincidently bottomed just as the Fed started raising rates. That seems interesting to say the least. Naturally, 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.

The backdrop as we move into the second quarter of 2022 is quite intriguing. Inflation is at four decade highs, the yield curve is inverting, recession fears are bubbling, supply chain disruptions are ongoing, energy markets are heading skyward, the Federal Reserve is starting a hiking cycle, and there is a war that has the attention of the entire world. But, the market just had the biggest weekly gain in over fifteen months, rising stars are at a record pace, companies are in solid financial shape, and default rates are extremely low. Clearly, it is important that we exercise discipline and selectivity in our credit choices moving forward. We are very much on the lookout for any pitfalls as well as opportunities for our clients. We will continue to carefully monitor the market to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis. 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.

i Bloomberg March 31, 2022: OPEC+ Stands Back as Oil Consumers Move to Ease Prices

ii Bloomberg March 22, 2022: Powell Is Ready to Back Half‐Point Hike

iii Bloomberg April 4, 2022: Economic Forecasts (ECFC)

iv Wells Fargo March 31, 2022: “Credit Flows”

08 Apr 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$28.0 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $49.1 billion.


(Bloomberg)  High Yield Market Highlights

  • The U.S. junk bond market is set to close the week with losses after declining for three straight sessions and yields rose 25 basis points to a three-week high of 6.32%, rising 25bps week-to-date amid broader market volatility.
  • “Risk assets sold off this week in light of increased hawkishness from the Federal Reserve,” Brad Rogoff, Barclays’ head of fixed income research, wrote on Friday.
  • The primary market priced $6b this week to make it the busiest for new issuance in two months after the slowest first quarter since 2016, with just $43b
  • Junk bond investors pulled cash from high yield funds in 11 of the 13 weeks in the first quarter, but are showing signs of demand again
  • U.S. high yield funds report a modest inflow of $0.5b for the week, the second consecutive week of inflows



(Bloomberg)  Markets Bet on Sharpest Pace of Fed Tightening Since 1994

  • Money-market traders are betting the Federal Reserve is heading for its most aggressive monetary-policy tightening in almost three decades as it fights a commodity-driven inflation spike.
  • They are pricing in a further 225 basis points of interest-rate hikes by the end of the year on top of the 25 basis points delivered in March.
  • Minutes of the Fed’s March meeting released Wednesday showed that “many” officials would have preferred to raise rates by a half percentage point but were deterred by Russia’s invasion of Ukraine. Only St. Louis Fed President James Bullard dissented in favor of a half-point hike. The Fed also signaled it will reduce its massive bond holdings at a maximum pace of $95 billion a month, further tightening credit to cool inflation.
  • The Fed hasn’t done that much tightening — 250 basis points — in one year since 1994, a famously brutal year for bond investors that even included a 75 basis-point hike. The last year there was more tightening was in the early 1980s, when Paul Volcker was in charge of the central bank. Treasuries have already lost 6.7% this year, heading for the worst annual return since Bloomberg started compiling the data in 1973.
  • With U.S. inflation heading for 8%, a rate not seen in 40 years, Fed officials have adopted a decidedly more hawkish tone. The latest move in market bets began Tuesday after Governor Lael Brainard said the central bank will continue tightening monetary policy methodically.
  • In a reversal of a recent trend, the yield curve has steepened since Brainard commented Tuesday that the Fed will shrink its balance sheet “considerably more rapidly than in the previous recovery.” The 10-year yields traded 8 basis points higher than two-year notes, after dipping below the shorter-maturity rate last week for the first time since 2019. The curve inversion last week stirred concern that the Fed’s tightening may raise the risk of a recession over time.
  • “The implication here is that over time, the balance-sheet reduction will lead to an increase in the term premium, which in turn will put upward pressure on the long end of the curve,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote in a note to clients.
  • The minutes showed participates agreed that the maximum monthly reduction of its bond holdings, composed of $60 billion in Treasuries and $35 billion in mortgage-backed securities, would “likely be appropriate.”
25 Mar 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$3.9 billion and year to date flows stand at -$31.1 billion.  New issuance for the week was $2.8 billion and year to date issuance is at $39.2 billion.


(Bloomberg)  High Yield Market Highlights

  • U.S. junk-bond investors turned to fast-food operator Yum Brands in the primary market on Thursday after inflation concerns, a hawkish Federal Reserve and the war in Ukraine drove issuance to the slowest month in two years. Yum Brands sold $1b 10-year notes, rated Ba3/BB, at 5.375%, the lower end of price talk, after underwriters received orders more than $2.9b. The bond sale was increased by $500m to $1b.
  • With yields volatile, borrowers are tapping the market when windows of opportunity arises to refinance or to fund acquisitions that have to close soon.
  • YUM Brands sold primarily to refinance 7.75% 2025 notes that were callable on April 1.
  • “The overall fundamentals are solid, with leverage back to pre- pandemic levels and higher interest coverage, which should provide a cushion against near-term macro risks and rising rates,” Barlcays’s strategist Brad Rogoff wrote on Friday.
  • U.S. junk bonds held steady for the second straight session as yields and returns were largely flat and equities rallied amid a broader risk-on sentiment.
  • While there was no serious loss of risk appetite or rising default fears priced into recent new issues, investors pulled cash out junk bond funds following a rise in yields and increased volatility.
  • The U.S. high yield funds reported an outflow for the 11th consecutive week and the longest streak of outflows since 2007.


(Bloomberg)  Powell Is Ready to Back Half-Point Hike in May If Necessary

  • Federal Reserve Chair Jerome Powell said the central bank is prepared to raise interest rates by a half percentage-point at its next meeting if needed, deploying a more aggressive tone toward curbing inflation than he used just a few days earlier.
  • Policy makers raised the benchmark lending rate by a quarter point at their meeting last week — ending two years of near-zero borrowing costs — and signaled six more hikes of that magnitude this year, based on the median projection. Powell indicated that half-point hikes may be on the table when policy makers next gather May 3-4 and at subsequent sessions.
  • “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said in a speech titled “Restoring Price Stability” to the National Association for Business Economics on Monday.
  • Following his formal remarks, Powell was asked by the moderator if there was anything stopping policy makers from hiking by a half point in May, which would be the first increase of that magnitude since 2000.
  • “What would prevent us? Nothing: Executive summary,” he said, drawing laughs from the audience. He added that such a decision had not been made, but acknowledged it was possible if warranted by incoming data.
  • “My colleagues and I may well reach the conclusion that we’ll need to move more quickly and if so we will do so,” he said.
  • Powell was more hawkish on Monday than at the press conference following last week’s meeting, indicating that if inflation continues to run hot he would favor a more aggressive pace of tightening. Last week he had to speak for the range of views among the 16 policy makers currently on the Federal Open market Committee.
  • Markets heard the chair’s message and moved sharply in response, sending Treasury yields spiking higher as investors increased bets that the Fed will raise interest rates by a half point in May to confront the hottest inflation in 40 years.
  • Goldman Sachs Group Inc.’s economists led by Jan Hatzius saw the comments as a hawkish signal and now expect the Fed to raise interest rates by 50 basis points at both its May and June policy meetings, followed by four 25 basis point increases in the second half of the year.
18 Mar 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.4 billion and year to date flows stand at -$27.1 billion.  New issuance for the week was $1.0 billion and year to date issuance is at $36.4 billion.


(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are poised to post the biggest weekly gains in almost three months after Fed Chair Jerome Powell highlighted the strength of the economy, fueling the largest three-day rally in equities since November 2020.
  • As the Federal Reserve began what is likely to be its most aggressive rate-hike campaign in two decades, Powell said the economy was strong and well-positioned to withstand tighter monetary policy.
  • Still, “a sustained rally will require more clarification about peak inflation and the economic ramifications of the ongoing Russia-Ukraine war,” Barclays’ strategists Brad Rogoff and Dominique Toublan wrote on Friday.
  • The rates curve indicates that persistently higher inflation will lead to higher short-term rates and could weigh on longer-term growth prospects, Barclays wrote.
  • The gains in high-yield debt were across the board, with CCCs, the riskiest part of the market, on track to close the week with the biggest advance in three months after rallying for two straight sessions.
  • Junk bond yields dropped 17bps to 6.12% on Thursday and spreads tightened 17bps to +369.
  • BB yields dropped 16bps to close at 5.01%, the biggest one-day fall in more than three months.
  • The Ba index posted gains of 0.69% on Thursday, and is likely to see the biggest weekly returns in three months, with gains of 0.4% so far.
  • The primary market was still quiet as borrowers wait for the markets to settle down after the FOMC decision to raise rates by 25bps, while indicating further 25bps hikes at each of the next six meetings.
  • The issuance volume stands at $36b year-to-date, the slowest first quarter since 2016, according to data compiled by Bloomberg.


(Bloomberg)  Fed Lifts Rates a Quarter Point and Signals More Hikes to Come

  • The Federal Reserve raised interest rates by a quarter percentage point and signaled hikes at all six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades even as risks to economic growth mount.
  • Policy makers led by Chair Jerome Powell voted 8-1 to lift their key rate to a target range of 0.25% to 0.5%, the first increase since 2018, after two years of holding borrowing costs near zero to insulate the economy from the pandemic. St. Louis Fed President James Bullard dissented in favor of a half-point hike, the first vote against a decision since September 2020.
  • “The American economy is very strong and well positioned to handle tighter monetary policy,” Powell told a press conference Wednesday following a meeting of the Federal Open Market Committee. “I saw a committee that is acutely aware of the need to return the economy to price stability.”
  • The hike is likely the first of several to come this year, as the Fed said it “anticipates that ongoing increases in the target range will be appropriate,” and Powell repeated his pledge to be “nimble.”
  • In the Fed’s so-called dot plot, officials’ median projection was for the benchmark rate to end 2022 at about 1.9% — in line with traders’ bets but higher than previously anticipated — and then rise to about 2.8% in 2023.
  • “The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” the FOMC said in its policy statement following the two-day meeting in Washington, the first held in person — rather than via videoconference — since the pandemic began. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
  • The Fed said it would begin allowing its $8.9 trillion balance sheet to shrink at a “coming meeting” without elaborating. Powell said officials had made good progress this week in nailing down their plans and could be in a position to begin the process at their May meeting, though the FOMC had not taken a decision to do so. The purchases of Treasuries and mortgage-backed securities, which concluded this month, were intended to provide support to the economy during the Covid-19 crisis and shrinking the balance sheet accelerates the removal of that aid.
  • In new economic projections, Fed officials said they see inflation significantly higher than previously anticipated, at 4.3% this year, but still coming down to 2.3% in 2024. The forecast for economic growth in 2022 was lowered to 2.8% from 4%, while unemployment projections were little changed.
  • The pivot to tighter monetary policy is sharper than policy makers expected just three months ago, when their median projection was for just three quarter-point rate increases this year.
  • The Fed previously held off from raising rates as officials bet the inflation shock would fade once the economy returned to normal following the pandemic recession and lockdowns, though they were also cautious amid new Covid-19 variants and data showing a choppy jobs recovery.
  • Instead, price gains accelerated amid a mixture of massive government stimulus, tightening labor markets, surging commodity costs and frayed supply chains. Powell has also been operating under a Fed policy framework, adopted in mid-2020, to allow some above-target inflation in the hope of broadening employment.
  • President Joe Biden has called taming inflation his top economic priority, while fellow Democrats worry failure to restrain prices could cost them their thin congressional majorities in November’s midterm elections.
11 Mar 2022

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.3 billion and year to date flows stand at -$27.4 billion.  New issuance for the week was $0.5 billion and year to date issuance is at $35.4 billion.


 (Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed toward the biggest weekly loss in 17 months as yields jump to a fresh 20-month high after inflation accelerated and the war on Ukraine intensified.
  • Continuing volatility drove investors to pull cash from retail junk-bond funds for the ninth straight week, the longest losing streak since 2007
  • U.S. high yield funds reported an outflow of $1.3b for the week
  • The escalating war has increased the economic pressure on Russia, with the U.S. now calling for the end of normal trade relations, clearing the way for increased tariffs on Russian imports
  • The sanctions are expected to spur inflation even higher and slow economic growth
  • Bloomberg economist Anna Wong forecast that U.S. inflation could hit 9% as early as March or April with oil at $120 a barrel, and may end the year close to 7%
  • Bloomberg economists have lowered 2022 U.S. GDP growth forecast to 2.5% from 3.6%
  • The benchmark U.S. high yield index posts a loss of 1.29% week-to-date after reporting negative returns in three of the last four sessions
  • The losses were across the board in the high yield market. BBs were leading the pack with week-to-date losses of 1.34%
  • BB yields, the most rate-sensitive in the high yield market, also climbed to a 20- month high of 5.08% amid widespread fears of inflation disrupting growth
  • CCCs are poised to post the least losses, with 1.20% week-to-date, while yields rose to a 16-month high of 8.82%
  • The junk bond primary market has been quiet as borrowers have stayed away, waiting for some clarity on macro risks
  • The primary market has slowed to a crawl
  • The issuance volume was about $36b year-to-date, the slowest first quarter since 2009
  • As of Friday morning, the markets may recover as U.S. equity futures edged higher amid reports that some progress is being made in talks between Russia and Ukraine


 (Bloomberg)  U.S. Inflation Hit Fresh 40-Year High of 7.9% Before Oil Spike

  • U.S. consumer price gains accelerated in February to a fresh 40-year high, consistent with rapid inflation that’s become even more pronounced following Russia’s invasion of Ukraine.
  • The consumer price index jumped 7.9% from a year earlier following a 7.5% annual gain in January, Labor Department data showed Thursday. The widely followed inflation gauge rose 0.8% in February from a month earlier, reflecting higher gasoline, food and shelter costs. Both readings matched the median projections of economists in a Bloomberg survey.
  • Excluding volatile food and energy components, so-called core prices increased 0.5% from a month earlier and 6.4% from a year ago.
  • The data illustrate the extent to which inflation was tightening its grip on the economy before Russia’s war brought about a spike in commodities, including the highest retail gasoline price on record. Most economists had expected February would be the peak for annual inflation, but the conflict likely means even higher inflation prints in the coming months.
  • To combat building price pressures, the Federal Reserve is set to raise interest rates next week for the first time since 2018. At the same time, the geopolitical situation adds uncertainty to the central bank’s rate hiking cycle over the coming year.
  • Fed officials could take a more hawkish stance if energy price shocks lead to higher and more persistent inflation, but they also may take a more cautious approach if sinking consumer sentiment and declining real wages begin to weigh on growth as the war drags on.
  • The February report showed that gasoline prices rose 6.6% from the prior month and accounted for almost a third of the monthly increase in the CPI. Some of that may reflect energy price spikes resulting from the first days of Russia’s invasion during the last week of the month. The impact will be more fully captured in the March CPI report.
  • So far this month, the retail price of a regular-grade gasoline has increased 19.3% to $4.32 a gallon, according to American Automobile Association data.

Food prices climbed 1% from the prior month, the largest advance since April 2020, the CPI report showed. Compared with February last year, the 7.9% jump was the biggest since 1981.