Author: Rich Balestra - Portfolio Manager

12 Apr 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • US junk bonds are headed for their second straight weekly loss as yields jump to a four-month high after the March core consumer price index rose for the third straight month, fueling fresh concerns that the Federal Reserve could delay interest-rate cuts to the end of year.
  • Junk-bond yields breached the 8% level, climbing to 8.02% on 04/11. Week-to-date losses hit 0.47% after the biggest one-day loss in two months on Wednesday. Losses spanned across ratings as investors pulled cash out of the asset class.
  • On Thursday, the producer price index also rose 2.1% from a year earlier, the biggest gain in 11 months, though some of the incorporating data sets in this index were a touch softer offering some relief after the surprise rise in the consumer price index
  • BB yields advanced to a new four-month high of 6.83% and are poised to rise for the third week in a row. Yields have risen 19 basis points in the last four sessions, prompting a loss of 0.55% this week so far
  • BBs are on track to end the week with losses and could be the biggest since mid-January
  • CCC yields rose 25 basis points since last Friday to 12.37%, a more than six-week high. Rising yields also pushed week-to-date losses to 0.28%.
  • Spreads held steady even while US Treasury yields soared. The 10- and 5-year US Treasury yields have risen 18 and 23 basis points, respectively, since last Friday to close at 4.59% and 4.63%
  • With much of the credit investor base focused on yield buying, spreads have benefited from the rate impact on all-in yields, Brad Rogoff and Dominique Toublan of Barclays wrote in a Friday note
  • Junk bond spreads closed at 301 basis points, a drop of 2 basis points week-to-date
  • BB spreads were still far below 200 basis points at 185, unchanged for the week
  • CCC spreads closed at a two-year low of 714 basis points, down just five basis points
  • Attractive yields and still-tight spreads against the backdrop of a strong and resilient economy drew borrowers into the market
  • April supply is near $13b and year-to-date at $97b

 

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.

05 Apr 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • US junk bonds are headed toward the biggest weekly loss since mid-January on renewed concerns about the Federal Reserve delaying rate cuts and holdings interest rates higher for longer on robust economic data. The drop was also driven by rising commodity prices, led by oil and copper, fueling more inflation concerns, with the commodity index climbing for six consecutive sessions to close at a four-month high. Data during the week showed expansion in US manufacturing activity, a resilient labor market, and a relatively strong services sector.
  • The negative returns in the US high-yield market spanned across ratings. CCCs, the riskiest segment of the junk bond market, are expected to rack up the biggest weekly loss since early January.
  • Yields jumped 16 basis points so far this week to 7.82%, the biggest weekly increase in 11 weeks. Spreads widened 13 basis points week-to-date to close at 312
  • CCC yields climbed 26 basis points for the week so far to 12.13%, the largest in 13 weeks
  • Single B and BB yields rose by 16 and 13 basis points, respectively, to 7.54% and 6.62%
  • While worries about the Fed delaying easing interest-rates spurred losses across risk assets, the extent of these losses moderated a bit after Fed Chair Jerome Powell suggested that recent inflation readings, though higher than expected, didn’t “materially change” the overall picture. He also reiterated that it will likely be appropriate to begin lowering rates “at some point this year”

 

(Bloomberg)  US Jobs Roar Again as Payrolls Jump 303,000, Unemployment Drops

  • US payrolls rose in March by the most in nearly a year and the unemployment rate dropped, pointing to a strong labor market that’s powering the economy.
  • Nonfarm payrolls advanced 303,000 last month following a combined 22,000 upward revision to job gains in the prior two months, a Bureau of Labor Statistics report showed Friday. The rise exceeded all expectations in a Bloomberg survey of economists.
  • The unemployment rate fell to 3.8%, with more people joining the workforce and able to find a job.
  • Job growth in March was led by faster hiring in health care, construction, as well as leisure and hospitality, which has now bounced back above its pre-pandemic level. A measure of the breadth of job gains increased.
  • “The US labor market appears to be strengthening, not slowing, and risks delaying Fed easing,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note.
  • The labor market has been the stalwart of the US economy, giving Americans the wherewithal to keep spending in the face of high prices and borrowing costs. While Fed officials have flagged moderation in job gains over the past year as a possible precursor to interest-rate cuts, Friday’s data may raise questions over the extent of that cooling and its implications for inflation.
  • An aggregate measure of weekly payrolls — which provides a broader reading of changes in earnings, hours and employment — rose 0.8%, matching the biggest monthly increase since January 2023.
  • Fed Chair Jerome Powell said Wednesday that labor supply and demand have come into better balance, nodding in part to more immigration. Policymakers have stressed they’re in no rush to lower borrowing costs and that incoming data will guide that decision.
  • Officials will see fresh figures on consumer and producer prices next week, followed by the March reading of their preferred inflation gauge — the personal consumption expenditures price index — before their April 30-May 1 meeting.
  • The jobs report is composed of two surveys: one of businesses that generates the payrolls and wage data, and another smaller one of households used to produce the unemployment rate.
  • The household survey also publishes its own measure of employment, which surged nearly a half million in March after declining in the prior three months. Many economists have discounted the recent weakness in this metric given that other indicators remain strong, such as unemployment claims and consumer spending.

 

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.

22 Mar 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • US junk bond rally came as a lagged response after Federal Reserve Chair Jerome Powell’s reiteration that rate cuts are likely to begin later this year. Yields plunged to a nearly 12-week low of 7.65%, after dropping for four straight sessions, and are on track for the biggest weekly decline in 10 weeks. Spreads tightened to a new two-year low of 292 basis points and are headed for third straight week of decline.
  • The broad junk bond gains were powered by expectations that the Fed will steer a soft landing after its officials’ median projection showed three quarter-point cuts in 2024.
  • The gains in the US junk bond market spanned across ratings. BB spreads, the most rate sensitive part of the high yield market, dropped to a new four-year low of 177 basis points. Yields closed at 6.47%, falling 19 basis points week-to-date, and are poised for the biggest weekly drop in almost 10 weeks
  • The index is headed to end the week with gains of 0.5%, rebounding from last week’s losses and spurred by the Fed’s reiteration that it was appropriate to slow the pace at which the central bank shrinks its balance sheet, suggesting further easing of its restrictive stance
  • BBs are poised to close the week with gains of 0.76%, the biggest since week ended Jan. 12, after notching the biggest returns in 11 weeks on Thursday
  • Single B yields tumbled to a fresh two-year low of 7.45% and have fallen 16 basis point this week, the biggest weekly decline in eight weeks. Spreads fell to 268 basis points, the lowest since 2007
  • CCC yields dropped back to below 12% and closed at 11.93%. Spreads closed at 718 basis points, tightening for the seventh straight week, the longest tightening streak since 2016
  • Borrowers and investors are still being drawn to the junk bond market amid steady yields and tightening spreads against the backdrop of a resilient economy and expectations of soft landing

 

(Bloomberg)  Fed Signals Three Cuts Still Likely, Despite Inflation Uptick

  • Federal Reserve officials maintained their outlook for three interest-rate cuts this year and moved toward slowing the pace of reducing their bond holdings, suggesting they aren’t alarmed by a recent uptick in inflation.
  • Officials decided unanimously to leave the benchmark federal funds rate in a range of 5.25% to 5.5%, the highest since 2001, for a fifth straight meeting. Policymakers signaled they remain on track to cut rates this year for the first time since March 2020, but they now see just three reductions in 2025, down from four forecast in December, based on the median projection.
  • Chair Jerome Powell, speaking to reporters after the Fed’s decision Wednesday, demurred when asked whether officials would lower rates at their coming meetings in May or June, repeating that the first reduction would likely be “at some point this year.”
  • He largely shrugged off recent data showing an uptick in inflation in recent months, saying, “It is still likely in most people’s view that we will achieve that confidence and there will be rate cuts.”
  • At the same time, he said the data supported the Fed’s cautious approach to the first rate cut, and added that policymakers are still looking for more evidence that inflation is headed toward their 2% goal.
  • Inflation has eased “notably in the past year but remains above our longer-run goal of 2%,” Federal Reserve Chair Jerome Powell said to reporters in Washington.
  • Powell also said it would be appropriate to slow the pace of the Fed’s balance-sheet unwind “fairly soon,” after policymakers held a discussion on their asset portfolio this week.
  • “The decision to slow the pace of runoff does not mean our balance sheet will shrink, but allows us to approach that ultimate level more gradually,” he said. “In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility of money markets experiencing stress.”
  • The Fed’s post-meeting statement was nearly identical to January’s, maintaining the guidance that rate cuts won’t be appropriate until officials have more confidence inflation is moving sustainably toward their 2% target.

 

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.

15 Mar 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • The US junk bond rally finally broke on Thursday with the biggest one-day loss in four weeks driving the market to its first modest weekly loss since mid February. Data showed inflation continues to be sticky, even as retail sales showed some sluggishness signaling consumer spending may not hold as strong.
  • The prices paid to US producers rose the most in six months, pushed by higher fuel and food costs reinforcing broad concerns that the Federal Reserve may not be persuaded to ease its interest-rate policy anytime in the first half of the year.
  • While the market is pricing in fewer cuts and Treasury yields have increased markedly, it is a positive for credit, Barclays’ Brad Rogoff and Dominique Toublan wrote in a note Friday.
  • Junk bond yields have risen six basis points in the last four sessions to 7.78.
  • While yields were higher, though steady in the 7.70%-7.80% range, spreads dropped to 302 basis points, the lowest since January 2022, and a decline of 12 basis points since the beginning of the week.
  • Modest losses extended across ratings snapping the 15-day gaining streak in CCCs, the riskiest part of the high yield market. CCCs posted a loss of 0.21% on Thursday, the first in 16 sessions.
  • CCC yields rose to 12.01%, a five basis-point increase from last Friday, and the first weekly jump in four weeks.
  • CCCs, powered by the 15-day gaining streak, are headed to small gains for the week, bucking the broader trend. The week-to-date gains are 0.15%.
  • A resilient economy, a steady labor market and strong corporate balance sheets have drawn borrowers and investors into the market.
  • Steady yields and prices below par are inducing borrowers to take advantage of the market. The index price has hovered around $92-$93 this year.
  • Four deals for more than $2b priced on Thursday, pushing weekly issuance volume to $4.2b. The month-to-date supply stands at $11.8b.
  • Year-to-date supply is $69b.
  • The primary market is expected to stay busy in the next two weeks, though it may slow down ahead of the Fed meeting next 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.

08 Mar 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • The US junk bond market is headed toward a third-straight weekly gain, with its current six-day winning streak the longest this year and yields dropping to 7.75%.
  • It’s allowed yields for the riskiest part of the market, CCCs, to fall below 12% for the first time this year.
  • They’ve fallen 21 basis points so far this week, on top of last week’s 31bp plunge, putting weekly returns at 0.64%.
  • CCC notes have had positive returns for 11 consecutive sessions, the longest since June, as it’s the best-performing asset class in US fixed income.
  • Spreads have dropped 15 basis points this week to 737, the tightest since May 2022.
  • The junk market’s rally gained momentum after Fed Chair Powell told Congress that rate cuts are likely this year and recession risks are not elevated in the near term.
  • Jobs data remains robust on the openings and unemployment claims front, ahead of this morning’s employment report for February.
  • Steady yields and historically tight spreads across ratings continue to draw borrowers and investors into the market.
  • Bloomberg Intelligence analysts Noel Hebert and Sam Geier predicted high-yield bond sales this month will range from 25b-$29b.
  • While things may slow some ahead of the next Fed meeting, bankers are prepping to begin a debt sale for the leveraged buyout of Truist Financial’s insurance brokerage business as loans for the deal get done.
  • Conversations with investors continue to indicate that yields of 7.8% in high yield and 5.3% in investment grade are attractive enough even though spreads are tight to support strong demand, Barclays’ Brad Rogoff and Dominique Toublan wrote in note this morning.

 

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.

01 Mar 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

 

  • The broad rally in risk assets has propelled CCCs, the riskiest part of the junk bond market, to the top as the best performing asset class in February. Returns for the month were 1.7% after climbing for six consecutive sessions. The gains came after S&P 500 breached the 5,000 level and steadily climbed to close at an all-time high.
  • CCC returns turned positive year-to-date for the first time in the last week of February, only to accelerate to rise as the best asset class for total returns in the US fixed income market.
  • CCC yields tumbled 43 basis points in February to close at a nine-week low of 12.24% bucking the broader trend as BB yields rose 17 basis points to 6.65%. Single B yields barely moved to close at 7.64%.
  • Broad macro economic data reiterated the narrative about strong and resilient growth amid a slower-than-expected decline in inflation. However, robust economic growth, against the backdrop of relatively stable inflation reading, bolstered risk assets across markets.
  • The recent outperformance of lower-quality assets has coincided with large gains in some of the riskier and more speculative parts of the market, such as cryptocurrencies, Barclays analysts Brad Rogoff and Dominique Toublan wrote in a Friday note.
  • Loose financial conditions continue to support risk-taking in the markets, they wrote.
  • Though spreads are historically tight, yields are supporting strong demand, the analysts reiterated again this morning.
  • Tight spreads, attractive yields and resilient economy have drawn US borrowers into the market powering a supply boom.
  • February supply of almost $27b pushed the year-to-date tally to $58b, a 70% jump year-over year.
  • New bond sales in February were up 86% over last February.

 

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.

23 Feb 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • US junk bonds notched their biggest one-day gains in more than four weeks and are poised for a rebound off last week’s losses to score the biggest weekly gains in four, as equities hit an all-time high, driving spreads to a more than two-year low of 306 basis points.
  • With the Federal Reserve signaling caution about its next move, credit markets remain quite “upbeat,” with strong “yield-driven” demand, Barclays analysts Brad Rogoff and Dominique Toublan wrote this morning.
  • While inflation risks remain in focus, growth is resilient and corporate earnings are still strong across cyclicals and noncyclicals, they wrote, adding that higher yields continue to compress spreads.
  • Dollar prices in the junk bond market are still low, making yields attractive to investors and supporting strong demand.
  • Spreads were crushed across ratings, with BB spreads tumbling to 185 basis points, the lowest since Jan. 2020.
  • Single B spreads plummeted to 278 basis points, the lowest since July 2007.
  • CCCs spreads dropped to a more than eight week low of 778 basis points, the lowest since December.
  • The gains were across the board as risk assets shrugged off inflation concerns and rallied on a resilient economy and strong labor market.
  • Yields dropped seven basis points to 7.83% and spreads moved closer to 300 basis points.
  • US borrowers are capitalizing on demand supported by low spreads and higher yields.
  • The primary market has priced more than $4b in new bonds this week, putting issuance at $23b for the month.
  • Year-to-date supply is at $54b, up 59% year-over-year.
  • Robust corporate earnings, combined with strong macro data, have pushed back recession concerns and bolstered risk assets.

 

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 Feb 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • US junk bonds may end a three-week rally as they head to close the week with modest negative returns. Markets were jolted earlier this week when faster-than-expected inflation caused the biggest one-day loss in four months.
  • The consumer price index rose by more than forecast in January on a monthly and annual basis, suggesting that the road back to the 2% inflation target will be bumpy.
  • However, the markets quickly pared those losses. The rebound got a boost after data showed US factory production declined for the first time in three months and retail sales dropped in January, indicating that inflation will moderate steadily toward the target.
  • Yields climbed to a five-week high of 7.91% on Tuesday after the surprise rise in inflation, but dropped to 7.84% after data showed retail sales fell the most in year and factory production declined. However, yields are still up nine basis points week-to-date at 7.84%.
  • The modest losses extend across ratings in the US junk bond market. CCC yields rose eight basis points for the week to 12.58% after jumping to 12.68% on Tuesday.
  • BB yields closed at 6.59% after rising to 6.63%, up eight basis points for the week. BBs are headed toward a second straight week of losses.
  • As the market was rattled by inflation data, US borrowers stayed on the sidelines as they assessed the risk appetite.
  • The primary market was relatively quiet after Monday. More than $6b priced on Monday to make it the busiest day since April 2023.
  • The month-to-date supply stood at almost $19b and year-to-date at $50b.
  • Even amid volatility, spreads were closer to 300 basis points and yields were still below 8%.
  • Barclays expects spreads to compress further to a range of 290-315 basis points in the next six months.
  • Marginal demand for yield is strong, and spreads seems to be an afterthought, Brad Rogoff and Dominique Toublan of Barclays wrote this morning.
  • We see limited headwinds from the macro side and credit fundamentals, they 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.

09 Feb 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • After a bumpy start to the year, US junk bonds are headed for their third straight week of gains, propelled by CCCs, the riskiest tier of the high yield market.
  • Gains spanned across the market, spurred by economic growth backed by strong labor market, expanding business activity and cooling inflation data, brushing off Federal Reserve officials’ chorus reiterating that the central bank is not in a hurry to ease monetary policy.
  • Risk assets were mostly higher this week, along with yields, as earnings results remained largely positive, Barclays’ Brad Rogoff and Dominique Toublan wrote on Friday
  • With macro data still benign, spreads should continue to react to yield moves as the incremental buyer is yield-focused, they wrote
  • CCC yields fell 11 basis points week-to-date to 12.45%, the biggest weekly decline within the high yield market. CCCs are on track to be the best performing asset in the US junk bond market, with week-to-date gains of 0.32%
  • The rally gained legs as fears of a recession receded in the backdrop of continuing strength in the labor market as US unemployment claims fell for the first time in three weeks
  • The broader US high yield index yield rose by three basis points to 7.79%. The rally in CCCs drove the modest gains in broader index
  • As spreads dropped to a six-week low of 321 basis points and yields hovered near 8%, US borrowers continued to crowd the primary market. Borrowers were in a hurry to capitalize on the still-low cost of debt, yet high enough to attract buyers, before the economy begins to show some expected signs of slowing in the second half
  • After a busy January, with the month-to-date supply at $8.55b, February is on track to be the busiest since 2021

 

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 Jan 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • US junk bond supply so far this month is 13% above that for all of January 2023, helped by $3.5b of sales Thursday that was the busiest session in three months.
  • The market is on track to have its heaviest overall month in more than two years, with new borrowers led by sponsor-owned companies rushing to refinance debt and extend maturities. Yields have held firmly below 8% and spreads remain below 350 basis points.
  • At least four borrowers are expected to sell about $4b in the coming days
  • Economic data continue to bolster sentiment, the latest being GDP growth trouncing forecasts amid a jump in personal spending
  • Resilient growth, strong business investment and new home sales have spurned recession calls and bolstered risk assets
  • Junk bonds are headed for weekly gains, with yields down 9bps to 7.80% and spreads narrowing 4bps to 334bps
  • Strength has been across ratings
  • BB yields have dropped back below 6.5% and spreads hover near 200bps, with the segment returning 0.4% so far this week
  • CCCs have climbed for six consecutive sessions, generating combined gains of 0.5% since Monday

 

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.