Author: Rich Balestra - Portfolio Manager

(Bloomberg)  High Yield Market Highlights

• US junk-bond issuers inundated the primary market this month, driving the supply of new securities to almost $23 billion, the most since January 2022. Seven of the 19 sessions month-to-date priced more than $2 billion, resulting in some of the busiest days since June. The flurry of new issuance partly caused yields to rise closer to 9% and spreads to near 400 basis points.
• US companies rushed to the debt markets to push off maturity payments, moving now in case the Federal Reserve’s plan to keep monetary policy tight pushes rates higher.
• Amid the flood of new supply and worries the economy could slide into a recession due to the Fed’s moves, investors pulled $2.4b from US high-yield funds during the week ended Sept 27, the most since Feb. 22.
• Yields rose and spreads widened across ratings this week.
• Oil prices have been surging, fanning fresh inflation concerns. Moreover, US consumer confidence slumped to a four-month low, a report said on Tuesday, reflecting renewed worries about a recession. Federal Reserve Chair Jerome Powell signaled last week that borrowing costs will likely stay higher for longer after one more hike this year.
• However, the primary market remained busy as companies capitalized on access to debt markets before investors get more cautious and discerning.
• While total returns have been challenging across asset classes, higher yields should support the demand backdrop for credit, Brad Rogoff and Dominique Toublan of Barclays wrote in a note to clients.

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 posted a loss of 0.5% on Thursday, the biggest one-day drop since July, as yields jumped to a roughly four-week high of 8.74% amid a decline in equities.
• The losses spanned all high yield ratings after latest data showed that initial jobless claims dropped, suggesting that a resilient labor market will reinforce the Federal Reserve’s position of keeping rates higher for longer, fueling further increases in borrowing costs in the coming months.
• The US high yield market is headed for the worst weekly loss since mid-August.
• The week-to-date losses are at 0.71%, reversing last week’s gains.
• CCCs, the riskiest part of the high yield market, were the worst performers on Thursday, with negative returns of 0.56%. CCCs are headed toward a weekly loss of 0.74%, the biggest in more than a month.
• CCC yields have surged to four-week high of 13%, rising for last five sessions.
• BB yields climbed to a 10-month high of 7.50%, after one-day loss of 0.52%.
• US borrowers rush to the market amid uncertainty about the impact of rates remaining higher for longer. The week-to-date supply is almost $16b.
• The high-yield pipeline is building up as companies try to borrow before yields rise further with the Fed’s higher-for-longer policy.
• The current environment is favorable for credit, with high yields, above-trend growth, decent credit fundamentals, and positive technicals, Brad Rogoff and Dominique Toublan at Barclays wrote this morning.
• They have revised their spread forecast for 2023 to 400-425 basis points from 475-500.
• This implies that all-in yields will remain in the high 8% area for high yield, Barclays wrote.

(Bloomberg)  Fed Leaves Rates Unchanged, Signals Another Hike This Year

• The Federal Reserve left its benchmark interest rate unchanged while signaling borrowing costs will likely stay higher for longer after one more hike this year.
• The US central bank’s policy-setting Federal Open Market Committee, in a post-meeting statement published Wednesday in Washington, repeated language saying officials will determine the “extent of additional policy firming that may be appropriate.”
• Fed Chair Jerome Powell said officials are “prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”
• The FOMC held its target range for the federal funds rate at 5.25% to 5.5%, while updated quarterly projections showed 12 of 19 officials favored another rate hike in 2023, underscoring a desire to ensure inflation continues to decelerate.
• “We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to our 2% goal over time,” Powell said at a press conference following the decision.
• He emphasized the Fed will “proceed carefully” as it assesses incoming data and the evolving outlook and risks, echoing remarks he made at the Fed’s annual symposium in Jackson Hole, Wyoming last month.
• “We’re fairly close, we think, to where we need to get,” Powell said.
• Fed officials also see less easing next year than they expected in June, according to the new projections, reflecting renewed strength in the economy and labor market.
• They now expect it will be appropriate to reduce the federal funds rate to 5.1% by the end of 2024, according to their median estimate, up from 4.6% when projections were last updated in June. They see the rate falling thereafter to 3.9% at the end of 2025, and 2.9% at the end of 2026.

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 coming off the biggest one-day gains in more than two weeks despite a surge in new debt sales, pushing the market toward a modest 0.31% gain for the week after advancing in three of the last four sessions.
• The gains lured US borrowers into the market, crowding the primary calendar and pushing the week’s supply tally to almost $10b, the most since November 2021.
• The positive returns extend across all high-yield ratings groups, with CCCs, the riskiest segment, on track to be the best performing for the week after gaining for six straight sessions. The week-to-date gains are at 0.75% vs 0.16% for BBs and 0.37% for single Bs.
• US companies are rushing to take advantage of current risk-on sentiment and stable market as they look to get ahead of any further increases in cost of debt as central banks embrace a higher-for-longer regime.
• Leveraged credit companies have capitalized on the recovery in primary markets to address the wall of maturing debt, Morgan Stanley’s analysts Vishwas Patkar, Joyce Jiang and Karen Chen wrote this morning.
• 2024 maturities across high-yield bonds and loans have dropped by 50% to about $70b, while 2025 maturities have declined by 34% to about $164b, Morgan Stanley wrote.
• Across the high-yield market, the reduction in maturities has been broad-based across ratings and sectors, whereas in loans, the B3/lower cohorts have lagged, now comprising a major share of what’s due in 2024, they wrote.
• As junk bonds recovered from last week’s losses, CCC yields dropped to a two-week low of 12.69%. Yields fell across the risk spectrum. The broader high yield index yields also fell to a two-week low of 8.48%.

(Bloomberg)  US Core CPI Picks Up, Keeping Another Fed Hike in Play This Year

• Underlying US inflation ran at a faster-than-expected monthly pace in August, leaving the door open for additional interest-rate hikes from the Federal Reserve.
• The so-called core consumer price index, which excludes food and energy costs, advanced 0.3% from July, marking the first acceleration since February, Bureau of Labor Statistics data showed Wednesday. From a year ago, it increased 4.3%, in line with estimates and marking the smallest advance in nearly two years.
• Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure rose 0.6% from the prior month, the most in over a year and reflecting higher energy prices. Gasoline costs accounted for over half of the advance in the overall measure in August, according to BLS.
• The report adds to concerns that the renewed momentum in the economy is reigniting price pressures. While Fed officials have been growing more optimistic they can tame inflation without a recession, a reacceleration in price growth could force them to push interest rates even higher — with the risk of sparking a downturn in the process.
• The CPI is one of the last major reports the Fed will see before its meeting next week, in which policymakers are largely expected to hold rates steady. Chair Jerome Powell said last month interest rates will stay high and could rise even further should the economy and inflation fail to cool.
• For most Americans, household budgets are still under strain. Energy costs broadly rose, especially gasoline, which rose more than 10% last month. Utility costs also increased. Grocery prices also rose, but at the slowest annual pace in two years.
• While inflation expectations have remained stable and the job market largely resilient, Americans are growing more pessimistic about the economy. Prices, especially for essentials, are still elevated, which has forced many to rely on credit cards or savings to support 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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed to the biggest weekly loss since mid-August, snapping a two-week gain, after yields jumped 14 basis points to 8.54% on renewed fears that the Federal Reserve will keep interest rates higher for longer.
• Chicago Fed President, Austan Goolsbee, told the Marketplace radio program on Thursday that “we are very rapidly approaching the time when our argument is not going to be about how high should the rates go.” Instead, “it’s going to be an argument of how long do we need to keep the rates at this position before we’re sure that we’re on the path back to the target.”
• Stronger-than-estimated macro data this week also bolstered some speculation that the Fed may hike interest-rates again in November for one last time. US service sector activity rose to a six-month high in August, suggesting a pick up in new orders and hiring, according to an Institute for Supply Management index. Also, applications for US unemployment benefits fell to the lowest since February, indicating a resilient labor market.
• Meanwhile, the junk-bond primary market is gearing for a rush of new supply as private equity firms look to close on LBO deals before the cost of debt rises further.
• It has sprung back to life after a summer lull pricing more than $800 million in just three sessions.
• Barclays estimates $15b-$20b of new bond supply and $20b-$25b in leveraged loans for September. The pipeline may be concentrated in technology, media and entertainment, Barclays wrote in a note this morning.
• US junk bond yields have risen 14 basis points week-to-date to 8.54% and spreads have widened 10 basis points to 376.
• Losses extended across ratings in the junk-bond market. CCC yields rose 14 basis points this week to 12.79%.

(Bloomberg)  Fed Officials Set to Double Growth Forecast Amid Strong Data

• The US economy has been looking so solid lately that Federal Reserve officials will probably need to double their projection for growth in 2023 when they publish an updated outlook later this month.
• Following a string of stronger-than-expected reports on everything from consumer spending to residential investment, economists have been boosting their forecasts for gross domestic product. One widely-followed, unofficial estimate produced by the Atlanta Fed even has it expanding 5.6% on an annualized basis in the third quarter.
• That marks a sharp turnaround from three months ago — the last time policymakers updated their own numbers — when the consensus view was that the economy would stall in the current quarter. And it may be enough to prompt Fed officials to scale back their estimates for interest-rate cuts in 2024.
• “Consumer spending was robust in June and July, so the third quarter is virtually baked in the cake at this point,” said Stephen Stanley, the chief economist at Santander Capital Markets US who is projecting 3.7% growth in the July-to-September period. “5% seems too high, but not impossible.”
• Any read on GDP growth above 3.2% would mark the strongest quarter since 2021, when the US was experiencing a rapid recovery from the initial shock of the pandemic. The acceleration is in stark contrast with the outlook for China, which has been downgraded in recent weeks amid a mounting property crisis.
• When Fed officials last updated their own projections for the US in mid-June, they showed the median policymaker thought GDP would expand just 1% in 2023. At the time, that marked an upgrade over the previous projection round in March, which implied a recession this year.
• That number will probably go up to 1.8% or 2% in the new projections set to be released at the conclusion of the central bank’s Sept. 19-20 policy meeting, and the outlook for the unemployment rate could be revised lower, according to Omair Sharif, president of Inflation Insights LLC.
• The growth upgrade may also lead Fed officials to scale back the easing they had projected for next year, Sharif said.
• The Atlanta Fed tracker — which is separate from policymakers’ quarterly projections — is volatile and will probably be revised down some before the government publishes its first official read on current-quarter growth at the end of October.
• But it underscores the widespread upswing in sentiment over the past few months. Better-than-expected numbers in a monthly Institute for Supply Management report on the US services sector published Wednesday bolstered the theme.
• Despite the rising optimism, the central bank has signaled it will probably leave its benchmark interest rate unchanged at the September meeting.

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

(Bloomberg)  Powell Signals Fed Will Raise Rates If Needed, Keep Them High

• Federal Reserve Chair Jerome Powell said the US central bank is prepared to raise interest rates further if needed and intends to keep borrowing costs high until inflation is on a convincing path toward the Fed’s 2% target.
• “Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said in the text of a speech Friday at the US central bank’s annual conference in Jackson Hole, Wyoming. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
• The Fed chief welcomed the slower price gains the US economy has achieved thanks to tighter monetary policy and further loosening of supply constraints after the pandemic. However, he cautioned that the process “still has a long way to go, even with the more favorable recent readings.”
• At the same time, Powell suggested the Fed could hold rates steady at its next meeting in September, as investors expect.
• “Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” he said.
• The remarks were in line with Powell’s character and communication for all of 2023: He is singularly focused on the mission of restoring price stability, and further tightening remains on the table to get back to 2% if necessary.
• Policymakers are entering a new phase of their campaign to bring inflation back to the Fed’s 2% target. After aggressive interest-rate increases in 2022, Powell and his colleagues have slowed the pace this year, and signaled they may be close to wrapping up rate hikes. The question now is how long they hold at a restrictive level and how the economy performs under those conditions.
• Officials raised their benchmark rate last month to a range of 5.25% to 5.5%, a 22-year high, after skipping a rate increase at their June meeting. Their most recent projections had one more rate increase penciled in this year.
• Powell signaled Friday that policy has shifted to a more deliberative phase where risk-management is now “critical.”
• He noted the economy may not be cooling as fast as expected, saying recent readings on economic output and consumer spending have been strong. The economy grew at a 2.4% annualized pace in the second quarter, a surprisingly robust reading that prompted many economists to boost forecasts for the third quarter and reconsider odds of a recession.
• “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said.
• He also pushed back on speculation that the central bank could raise its inflation target, an idea that has been hotly debated mostly by academics in recent months. “Two percent is and will remain our inflation target,” he said.

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 toward their worst weekly loss since June after steadily falling for five straight sessions. Thursday’s loss of 41% is the biggest one-day slide in six weeks as yields rose 10 basis points to a more than five-week high of 8.67%.
• Risk appetite softened after minutes of the last Fed meeting indicated that the Fed was not done with raising interest rates. The BB index is on track for the biggest weekly loss since February, with week-to-date negative returns at 0.8%.
• BB yields soared to a five-month high of 7.37%. CCCs may also end the week with the biggest loss in six.
• The Fed minutes did not give a definitive steer on the next rate decision in September, saying future moves “should depend on the totality” of incoming data and its implications for the outlook.
• Wary investors pulled cash from US high yield funds, with an outflow of $1.09b for week ended August 16. This is the fourth consecutive week of outflows from the asset class.
• The June to July rally in junk bonds, fueled by easing inflation pressures and on expectations that the Fed was nearing the end of the rate-hiking cycle, pulled US borrowers out of the sidelines.
• Light primary activity, still solid corporate fundamentals, and broad shifts in index quality and sector composition have all contributed to relatively tight spreads, Amanda Lynam, head of macro credit research at BlackRock Financial Management, wrote 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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds rebound from last week’s losses and are headed to post the biggest weekly gain since mid-July. After steadily rallying for five straight sessions buoyed by a subdued consumer inflation reading, expectations are rising that the Federal Reserve will pause its interest-rate hiking campaign.  The current wave of disinflation has legs, primarily reflecting the lagged impact of past Fed hikes and a downshift in economic activity, wrote Bloomberg economists Anna Wong and Stuart Paul on Thursday.
• The rally in junk bonds gained momentum after the smallest back-to-back gains in US consumer prices in more than two years.
• Philadelphia Fed President Patrick Harker said the US central bank may be able to cease interest-rate increases, barring any surprises in the economy. Richmond Fed President Thomas Barkin said it was too soon to say whether another rate increase at the Fed’s next meeting in September would be appropriate.
• The gains spanned across all high yield ratings, with CCCs, the riskiest of junk bonds, also recovering from last week’s losses to post gains of 0.99% week-to-date, the biggest since mid-July.
• CCC yields tumbled 26 basis points on Thursday to close at 12.79% after dropping in the three of the last four sessions. Yields fell 21 basis points for the week.
• BBs ended the two-week losing streak, with week-to-date returns of 0.28%.
• Goldman Sachs strategists led by Lotfi Karoui and Michael Puempel assess the near-term risks from corporate debt on US economy and markets, and conclude that risks are manageable and are unlikely to present any systemic risk.
• The rally also drove the primary market, with the week-to-date volume at almost $5b pushing the month-to-date tally to more than $7b.

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 worst weekly loss in six, as risk appetite wobbled on Fitch’s downgrade of US government debt, higher longer-dated Treasury yields and a Senior Loan Officer Opinion Survey that showed tightening lending standards.  While it was business as usual for the primary market, the week-to-date losses, at 0.72%, span the ratings spectrum. BBs, the top ratings in the junk universe, are on track for the biggest weekly loss in almost four months.
• The high yield index yield rose to a three-week high of 8.61%.
• BB yields jumped 22 basis points to 7.27%, a four-week high. CCC yields rose 31bps to 13.15%, also a four-week high.
• CCCs are also poised for the biggest weekly loss in six, with negative returns of 0.83% week-to-date.
• After reaching year-to-date tights at the end of July, spreads widened sharply amid a significant increase in long-dated Treasury yields, Brad Rogoff and Dominique Toublan wrote this morning. These developments, if sustained, could pose a challenge to the soft-landing narrative, they wrote.
• The broader risk-off sentiment initially fueled by Fed survey of senior loan officers renewed concerns of a possible recession and a spike in default rates. The selloff gained momentum after Fitch action on US debt.
• Investors pulled over $1b from US high yield funds for the week ended Aug. 2, the biggest weekly outflow from high- yield funds since May.
• However, US borrowers were largely undeterred. The primary market priced more than $3b this week. And banks, led by Citigroup and Bank of America, are readying to offload some of the debt that helped fund Apollo Global Management’s buyout of the auto-parts maker Tenneco as early as 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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds lost some momentum on renewed concerns that strong macro data will pressure the Federal Reserve to raise rates again, prolonging the most aggressive policy tightening in decades. Junk bonds posted a modest loss of 0.1% on Thursday, on pace to end the two-week gaining streak. Yields jumped nine basis points to 8.44%, the biggest one-day increase in more than two weeks, after rising steadily in three of the last four sessions.
• Gross domestic product accelerated, orders for business equipment were stronger-than-expected and unemployment claims were lower despite an aggressive interest-rate hike campaign with rates at a 22-year high. Fed Chair Jerome Powell said the central bank could raise or hold in September, depending on the data.
• The softness extended across ratings in the US high yield market. The week-to-date losses in single-Bs are 0.03% and BBs 0.16%.
• CCCs, the riskiest part of the US high yield market, bucked the broad trend. CCCs are heading toward third consecutive week of gains, with week-to-date returns at 0.38%, after rallying for straight sessions.
• The gains in CCCs were partly fueled on expectations that the economy will dodge recession.
• “The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Powell said Wednesday during a press conference following a policy meeting.
• US high yield funds reported an outflow of $376m for week ended July 26.
• The primary market was steadily building up, though a tad cautiously, as US borrowers took advantage of strong technicals, namely light supply.
• New bonds were inundated with demand as investors looked for new paper amid thin supply.

(Bloomberg)  Fed Raises Rates as Powell Keeps Options Open for Future Hikes

• The Federal Reserve resumed raising interest rates and Chair Jerome Powell left open the possibility of further hikes, which he emphasized will depend on incoming data that has recently signaled a resilient US economy.
• After pausing rate increases in June, policymakers lifted borrowing costs again at their policy meeting on Wednesday for the 11th time since March 2022 to curb inflation. The quarter percentage-point hike, a unanimous decision, boosted the target range for the Fed’s benchmark federal funds rate to 5.25% to 5.5%, the highest level in 22 years.
• While Powell pointed to encouraging signs that the Fed’s rate hikes are working to curb price pressures, he reiterated that policymakers have a long way to go to return inflation to their 2% goal.
• The Fed chief refused to be pinned down on when officials may hike again, citing a raft of economic reports due before the Fed’s next meeting in September, including two jobs reports, two reports on consumer-price inflation and data on employment costs.
• “All of that information is going to inform our decision as we go into that meeting,” he said. “It is certainly possible that we would raise [rates] again at the September meeting, if the data warranted. And I would also say it’s possible that we would choose to hold steady at that meeting.”
• Markets took the decision in stride. Swaps traders held fairly steady the probability they see of the Fed hiking rates by an additional quarter point before year’s end. The pricing implies just slightly over 50% chance of another bump higher before the Fed tightening cycle ends.

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.