Insight – Cincinnati Asset Management

17 Jul 2025

Insight, Investment Grade Quarterly Josh Adams - Portfolio Manager 0 comment

2025 Q2 Investment Grade Quarterly

Second Quarter Recap & Outlook
July 2025

Investment grade credit had another solid quarter of performance during the second period. Credit spreads were volatile during the month of April before grinding tighter into May and throughout June.

Second Quarter Review

The second quarter was tumultuous for risk assets as the “Liberation Day” tariff announcement occurred early in the period on April 2nd. The tariff package went into effect just days later before a 90-day pause was announced on April 9th with an exception for China. Global equities plummeted and credit spreads drifted wider before both steadily retraced into quarter-end. During the second quarter, the option adjusted spread (OAS) on the Bloomberg US Corporate Bond Index tightened by 11 basis points to 83 after it began the quarter at a spread of 94. The spread on the index traded as wide as 119 in early April but IG credit was much better behaved than most other asset classes from a volatility perspective. Remarkably, even given the economic malaise as a result of US trade policy, lower quality BAA-rated IG credit slightly outperformed higher quality AAA & AA-rated credit through the first six months of the year. Intermediate maturities meaningfully outperformed longer duration maturities through the first six months. Shorter Treasury yields moved lower throughout the year but the 30yr bond yield remained elevated.

Year-to-date through quarter end, the 2yr-5yr-10yr Treasury yields had declined by 52, 58 and 34 basis points, respectively. Meanwhile, the 30yr Treasury closed above 5% several times in late May before moving lower in June and finishing the month at 4.77%. Through the end of the second quarter, the 30yr was within less than a full basis point of where it began 2025. One thought as to why intermediate rates have moved lower while the 30yr has been stagnant is that the long end of the Treasury market is driven much more by the outlook for fiscal and monetary policy as well as inflation expectations.

With credit spreads inside of historical averages, coupon income remained an important driver of investor returns through the first six months of the year. Coupon income accounted for 2.32% of the Corporate Index year-to-date total return through June 30th, while price appreciation accounted for 1.81% and other factors contributed 0.04%.

Taking credit spreads and Treasury yields together, the yield to worst on the corporate index finished the quarter at 5% relative to its 10yr average of 3.78%. Credit spreads finished the quarter with an index spread of 83 compared to the 10yr average of 119. While credit spreads look somewhat snug, we believe that this is a classical “buy the yield, not the spread” environment for investors and we continue to believe that investment grade credit offers compelling risk reward for its credit quality and duration.

The Power of Diversification

The volatility of the second quarter provided an excellent example of the usefulness of investment grade credit as a diversifier in asset allocation. Diversification is not necessarily about increasing returns but rather reducing risk and maximizing growth potential over a longer time horizon. One measure of downside protection is “drawdown” which is the return calculated as the percentage decline in value from the previous peak to the subsequent trough. We examined YTD daily returns for a variety of asset classes through the first six months of 2025.

There has been a retracement in all of the above asset classes, but when the news cycle was at its worst and investor fears were at their peak, the impact on investment grade credit was relatively limited compared to riskier assets. It remains to be seen if this retracement is overdone, as the impact of US trade policy on the global economy may not yet have been fully realized. Investment grade corporate bonds have historically produced returns that have limited drawdown while providing advantageous risk adjusted returns during periods of uncertainty.

FOMC Holding Steady (For Now)

The FOMC met twice during the second quarter, in May and June and elected to hold its policy rate steady both times, a continuation of the pattern that has been in place for all four of 2025’s meetings. Four meetings remain this year: July 30, September 17, October 29 and December 10. Although the consensus view of investors is that there will not be a cut at the July meeting, Chairman Powell declined to rule it out at a central bank gathering in Portugal on July 1st. On July 3rd, nonfarm payrolls for the month of June posted a solid beat relative to expectations and the unemployment rate fell. This likely closed the door on the possibility of a July cut. Instead, investors have coalesced around the likelihood of the first cut of the year occurring at the September meeting with Fed Funds Futures pricing a 92.3% probability of a cut at quarter end with those expectations falling to an 68.1% chance on July 3rd after the June payroll report.

At the end of the second quarter futures were pricing -67bps worth of cumulative cuts before the end of 2025. The FOMC took a slightly more hawkish view with the most recent release of the Summary of Economic Projections (dot plot) on June 18th. The Fed dots showed that the median FOMC member was expecting -50bps of cuts in 2025 with one additional -25bp cut in 2026. Investors were meaningfully more dovish than the Fed at quarter end with futures pricing -135bp of cuts through the end of 2026. This translates to 5.4 25bp cuts versus the FOMC median outlook for 3 25bp cuts.

We continue to expect 1-2 cuts in 2025. The labor market has been gradually cooling for some time but it has not shown signs of serious deterioration just yet. If it gets to that point in the cycle then that is when there is more potential for a flurry of cuts from the FOMC as they would likely move quickly to stabilize the economy.

Sentiment Can Change Quickly

With the potential for policy cuts looming on the horizon, the opportunity to invest at elevated yields could be fleeting. When we look back to April, it was rather shocking how swiftly equity markets turned on a dime. Volatility could surge again in the absence of a series of trade deals. Geopolitical issues remain at the forefront in Europe and the Middle East. We will continue to position the portfolio conservatively, with a preference for stable credits that can generate cash during uncertain economic times. Thank you for the trust that you have placed in us.

In the adjacent table you will find portfolio statistics that are representative of a new account for each of our investment strategies. Please contact us with any questions.

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. 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. Index returns and related data such as yields and spreads are shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s portfolio. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. There is no assurance that any securities discussed herein have been held or will be held in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings, if any. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Upon request, Cincinnati Asset Management will furnish a list of all security recommendations made within the past year.

Additional disclosures on the material risks and potential benefits of investing in corporate bonds are available on our website: https://www.cambonds.com/disclosure-statements/.

15 Jul 2025

High Yield Quarterly, Insight Rich Balestra - Portfolio Manager 0 comment

2025 Q2 High Yield Quarterly

Q2 COMMENTARY
July 2025

In the second quarter of 2025, the Bloomberg US Corporate High Yield Index (“Index”) return was 3.53% bringing the year to date (“YTD”) return to 4.57%. The S&P 500 index return was 10.94% (including dividends reinvested) bringing the YTD return to 6.20%. Over the period, while the 10 year Treasury yield increased 2 basis points, the Index option adjusted spread (“OAS”) tightened 57 basis points moving from 347 basis points to 290 basis points.

With regard to ratings segments of the High Yield Market, BB rated securities tightened 48 basis points, B rated securities tightened 65 basis points, and CCC rated securities widened 1 basis point. The chart below from Bloomberg displays the spread move of the Index over the past five years. For reference, the average level over that time period was 367 basis points.

The sector and industry returns in this paragraph are all Index return numbers. The Index is mapped in a manner where the “sector” is broader with the more specific “industry” beneath it. For example, Energy is a “sector” and the “industries” within the Energy sector include independent energy, integrated energy, midstream, oil field services, and refining. The Transportation, REITs, and Technology sectors were the best performers during the quarter, posting returns of 5.17%, 4.77%, and 4.52%, respectively. On the other hand, Natural Gas, Energy, and Banking were the worst performing sectors, posting returns of 1.55%, 1.98%, and 2.07%, respectively. At the industry level, transport services, office REITs, and healthcare REITs all posted the best returns. The transport services industry posted the highest return of 7.97%. The lowest performing industries during the quarter were railroads, oil field services, and paper. The railroads industry posted the lowest return of -2.43%.

The first half of the year had fairly strong issuance with Q1 posting $86.6 billion and Q2 posting $78.2 billion. Of the issuance that did take place during Q2, Discretionary took 20% of the market share followed by Energy and Financials at 16% share each.

The Federal Reserve did hold the Target Rate steady at the May meeting and the June meeting. There was no meeting held in April. The current Fed easing cycle stands at 100 basis points in total cuts and kicked off in September of last year. The Fed dot plot shows an additional 50 basis points of cuts expected for the year. Market participants are forecasting a bit more aggressive Fed and are pricing in an implied rate move of 64 basis points in cuts for 2025. After the June meeting, Fed Chair Jerome Powell commented that the central bank was “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.” Many Fed officials have made known their desire to wait for more clarity on broader potential impacts from current economic policies. In fact, seven of the nineteen members project zero cuts in 2025. The varied member opinions prompted a question which Powell addressed. Noting the economic uncertainty, he said, “No one holds these rate paths with a lot of conviction.” The Fed did update their economic projections. The forecast for slowing growth, rising inflation, and higher unemployment provides some additional context for the differing member sentiments.

Intermediate Treasuries increased 2 basis points over the quarter, as the 10-year Treasury yield was at 4.21% on March 31st, and 4.23% at the end of the second quarter. The 5-year Treasury decreased 15 basis points over the quarter, moving from 3.95% on March 31st, to 3.80% at the end of the second 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 first quarter GDP print was -0.5% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2025 around 1.5% with inflation expectations around 2.7%.

Being a more conservative asset manager, Cincinnati Asset Management does not buy CCC and lower rated securities. Additionally, our interest rate agnostic philosophy keeps us generally positioned in the five to ten year maturity timeframe. During Q2, our higher quality positioning was a bit of a drag on performance as lower rated securities outperformed. Other performance detractors included a cash drag given the positive Index performance, our credit selections within the consumer non-cyclicals sector, and our underweight in the communications sector. Benefiting our performance this quarter were our credit selections in the consumer cyclical sector and banking sector. Another benefit was added due to our underweight in the oil field services industry.

The Bloomberg US Corporate High Yield Index ended the second quarter with a yield of 7.06%. Treasury volatility, as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index), remains elevated from the 80 index average over the past 10 years. The current rate of 91 is well below the spike near 200 back during the March 2023 banking scare. The MOVE Index had a general downward trend over the last two years that appears to be flattening out. Data available through May shows 12 bond defaults this year which is relative to 16 defaults in all of 2022, 41 defaults in all of 2023, and 34 defaults in all of 2024. The trailing twelve month dollar-weighted bond default rate is 1.76%. The current default rate is relative to the 2.15%, 1.85%, 2.13%, 1.72% default rates from the previous four quarter end data points listed oldest to most recent. Defaults are generally stable and the fundamentals of high yield companies are in decent shape. From a technical view, fund flows were positive this year through May data at $5.4 billion. No doubt there are risks, but we are of the belief that for clients that have an investment horizon over a complete market cycle, high yield deserves to be considered as part of the portfolio allocation.

The high yield market performed quite well in Q2. The quarter began with market participants dealing with the shock of eyepopping tariff numbers. Then negotiations of trade deals began in earnest. While signs of progress started to be made, the market took notice. Toss in easing geopolitical tensions for good measure and the result was strong market performance. Even consumer sentiment readings ticked up by the end of the quarter. The Fed is evaluating rate cuts “meeting by meeting” and are content to wait on hard data. As we go to print, a strong employment report likely takes a cut in July off the table. Also, as we go to print, Congress just pushed through a major piece of legislation. There will certainly be plenty to chew on as we move into the back half of the year. Our exercise of discipline and credit selectivity is important as we continue to evaluate that the given compensation for the perceived level of risk remains appropriate. As always, we will continue our search for value and adjust positions as we uncover compelling situations. Finally, we are very grateful for the trust placed in our team to manage your capital.

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

27 Jun 2025

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bond yields plunged to a new six-month low and spreads still hovered near a more than three-month low driving supply to nearly $33 billion in June, the busiest month for new bonds sales since September.
Yields fell 21 basis points in four sessions and declined for five straight weeks to close at 7.09%, the lowest since December.
The rally across risk assets was fueled by easing concerns about immediate geopolitical tensions and on expectations that the Federal Reserve will begin rate cuts as data showed US consumer confidence fell unexpectedly and new home sales dropped the most since 2022 on poor affordability. The speculation about rate cuts gained legs after Fed revised its growth forecast for 2025 to 1.4%, down from 1.75% earlier.
The broad rally in the US junk bond market gained momentum after investors poured cash into the asset class. US junk bonds took in a cash haul of $3.46b for week ended June 25, the biggest weekly inflow since November 2023. This is the ninth consecutive week of cash inflows into high yield funds
In the primary market, the week’s supply was more than $8b. The June tally is $32.85b
Barclays revised its 2025 supply forecast downward saying they expect a vast majority of issuance to be refinancings
The recent gains in the US high-yield market extended across ratings. BB yields, the top tier in the high-yield universe with low risk of default, dropped to close at an eight-month low of 5.93% driving gains for six straight sessions
Single B spreads closed at 280 basis points, still floating near a six-month low. Yields closed at a new year-to-date low of 7%

27 Jun 2025

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads were mostly unchanged this week through Thursday, sitting very near cyclical tights. Technically, the OAS for the US Corporate Bond Index was 1bp wider on the week through Thursday. The index has traded in a tight 5bp range of 84-89 since the final trading days of May. The tone is stable Friday morning as we go to print. The 10yr Treasury yield moved slightly lower throughout the week, from 4.38% last Friday to 4.25% Friday morning. Through Wednesday, the Corporate Bond Index year-to-date total return was +3.85% while the yield to maturity for the Index closed the day at 5.04%.

Economics

It was an interesting week for data. Housing was mixed as existing home sales came in with a slight beat but new home sales numbers were extremely weak as sticky mortgage rates have done little to incentivize buyers to come off the sidelines and were a headwind for affordability. GDP was revised down from -0.2% to -0.5%. Finally on Friday, personal income fell more than expected and spending also declined. Core PCE came in a tick higher than expected but investors were sanguine on the number as most of the inflation came on the services side making it a classic “better than feared” print. Taking it all together, there is still not much evidence in the numbers that show that tariffs are having an outsize impact on inflation but there is some evidence of consumers pulling back on spending. Various Fed commentators lamented during the week (Daly, Waller) that the central bank may indeed need to start cutting its policy rate sooner rather than later. However, there are still numerous FOMC voting members, including Chair Powell, that prefer a more deliberate approach.

Next week, the big highlight is the employment report for the month of June which will be released a day early on Thursday due to the 4^th of July holiday.

Primary Market

This week was busier than most forecasters had predicted as nearly $37bln of new debt was priced, easily besting the estimate of $25bln. Yankee issuers led the way this week, that is companies that are based in other countries (or foreign governments) that elect to issue $USD in the US corporate market. Next week is expected to be very light with the 4^th of July holiday looming at the end of the week. Underwriters are looking for just $5-$10bln of new supply. YTD new issue volume has now crested $890bln which is +3% ahead of 2024’s pace. Recall that 2024 was the second busiest year ever for the primary market, trailing only the pandemic fueled rush for liquidity that occurred during 2020.

Flows

According to LSEG Lipper, for the week ended June 25, investment-grade bond funds reported a net inflow of +$1.3bln. Total year-to-date flows into investment grade were +$18.5bln.

20 Jun 2025

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bond yields held steady, with spreads still at a three-year low fueling a wave of new bond sales to push June’s tally to nearly $22b. That’s already 23% more than the full month of June 2024 and up almost 70% on June 2023.
The market awaits the pricing of a $5b, five-year debt sale by Elon Musk’s xAI, split into loans and bonds. Pricing and allocation expected sometime later today.
As yields held steady and with spreads still hovering near 300 basis points, the primary market is inundated with supply, driving the week’s volume to nearly $6b
The junk bond rally lost some momentum on Wednesday after Fed Chair Jerome Powell indicated that the impact of tariffs on prices will show up later this summer
Fed’s new forecasts showed weaker growth, higher inflation and higher unemployment. This prompted Fed officials to project two rate cuts this year
The gains across the high yield market are modest even as junk bonds head for a fourth week of gains

(Bloomberg) Fed Officials Hold Rates Again, Still See Two Cuts by Year End

Federal Reserve officials continued to pencil in two interest-rate cuts in 2025, though new projections showed a growing divide among policymakers over the trajectory for borrowing costs as tariffs make their way through the US economy.
The Federal Open Market Committee voted unanimously on Wednesday to hold the benchmark federal funds rate in a range of 4.25%-4.5%, as they have since the beginning of the year. They also released new economic forecasts — their first since President Donald Trump unveiled a sweeping set of tariffs in April — showing they expect weaker growth, higher inflation and higher unemployment this year.
Speaking to reporters following the decision, Chair Jerome Powell repeated his view that the central bank was “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.”
Interest-rate projections released alongside the decision show a split: Seven officials now foresee no rate cuts this year, compared with four in March, and two others pointed to one cut. At the same time, 10 officials expect it will be appropriate to lower rates at least twice before the end of 2025.
In the run-up to this month’s meeting, many officials signaled their preference to hold rates steady for some time as they wait for clarity on how Trump’s economic policies will affect inflation and the broader economy.
Asked about the division in officials’ rate projections, Powell downplayed it. Given the high level of uncertainty in the economy, he said, “No one holds these rate paths with a lot of conviction.”
In their updated economic forecasts, officials raised their median estimate for inflation at the end of 2025 to 3% from 2.7%. They marked down their forecast for economic growth in 2025 to 1.4% from 1.7%.
They forecast an unemployment rate of 4.5% by the end of the year, up slightly from their previous estimate.
The projections reflected the thorny situation facing Fed policymakers.
Growing inflationary pressures typically suggest the Fed policy should restrain the economy with elevated rates, while weakening growth calls for stimulus through lower rates. Trump this year has repeatedly pushed for the Fed to cut rates, arguing the central bank under Powell has often been late to adjust policy.
Neither employment nor inflation data have yet shown a substantial impact from tariffs. A measure of underlying consumer inflation rose in May by less than forecast, spurring Trump to renew his call for lower rates.
Powell said the committee continued to expect tariffs to work their way into final prices, but that it would take time.
“Ultimately the cost of the tariff has to be paid and some of it will fall on the end consumer,” he said. “We know that because that’s what businesses say, that’s what the data say from the past.”
“We know that’s coming and we just want to see a little bit of that before we make judgments prematurely,” he added.

20 Jun 2025

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads were unchanged this week through Wednesday, while the capital markets were closed on Thursday in observance of Juneteenth. The tone is little changed this Friday morning as we go to print with the US Corporate Bond Index wrapped around a spread (OAS) of 85. The 10yr Treasury yield moved slightly higher this week as the benchmark went from 4.40% at the end of last week to 4.43% early Friday morning. Market sentiment is cautious overall given the backdrop of geopolitical uncertainty. Through Wednesday, the Corporate Bond Index year-to-date total return was +2.92% while the yield to maturity for the Index closed the day at 5.18%.

Economics

Retail sales were soft this week, though a large part of that move was driven by a decline in auto-sales. Still, it points to continuing struggles for the retail industry driven by tariff uncertainty. The May industrial production report was better than feared as the gauge continued to muddle along with some pockets of strength. Housing starts and permits data was very soft as total housing starts fell almost 10% in May driven by multifamily. There are a multitude of headwinds for the housing sector, most especially the high cost to build, elevated cost of capital and stubbornly high mortgage rates.

The highlight of the week was the FOMC meeting where the central bank held rates steady in what was a unanimous decision by all 12 voting members. There are some diverging views of committee members when looking at the Summary of Economic Projections (dot plot). The most recent version of the dots, released every three months, showed that the median FOMC member continued to expect 50bps of cuts in 2025. There were a number of committee members that believed the FOMC should remain on hold all year and that grew from 4 members to 7 members since the last dot plot in March. We continue to expect 1-2 cuts in 2025 as our base case but 3 or 4 cuts is a distinct possibility if the economy continues to soften.

There are some interesting prints next week including PMI, existing home sales, GDP, durable goods and finally the Fed’s preferred inflation gauge on Friday morning, core PCE.

Primary Market

Issuance was in line with expectations this week as $18bln of debt priced on Monday & Tuesday. It was a somewhat disjointed week for the primary calendar with the FOMC meeting on Wednesday and a market holiday on Thursday. YTD issuance stands at $853.2bln, slightly ahead of 2024’s pace. The street is looking for $20-$25bln of issuance next week with most of that activity expected in the front half of the week.

Flows

According to LSEG Lipper, for the week ended June 18, investment-grade bond funds reported their third consecutive week of inflows at +$929.6m. Total year-to-date flows into investment grade were +$17.23bln.

13 Jun 2025

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds may snap a 13-day gaining streak after Israel’s strikes on Iran’s nuclear sites sparked a flight to haven assets, including US Treasuries and gold. US equity futures retreated as investors await Iran’s response amid concern the conflict could widen.
US junk bond yields held steady at 7.36% on Thursday, and spreads were range-bound, closing at 306 basis points and pushing positive returns for the 13th consecutive session. The primary market has slowed down after a torrid pace of issuance drove supply to nearly $16b so far this month.
The modest gains in the US junk bond market extended across ratings. CCC yields fell 10 basis points to 11.28% on Thursday. Spreads closed lower at 710, fueling small gains for the second session in a row
BB yields closed flat at 6.14% and spreads closed at 183, driving positive returns for the fourth straight session
The rally in the US high yield market was partly prompted by renewed bets that the Federal Reserve will cut rates twice this year as inflation moderates. It was also fueled by cash inflows into the asset class
Credit continues to benefit from strong demand, Barclays strategists Brad Rogoff and Dominique Toublan wrote in note this morning. Current backdrop remains supportive for credit, and expect valuations to remain steady in the near term, they wrote
Steady returns, attractive yields, and cash inflows into the asset class drove primary market supply
The pipeline is building as borrowers stream in to take advantage of strong demand for yield

(Bloomberg) US Core Inflation Rises Less Than Forecast for Fourth Month

Underlying US inflation rose in May by less than forecast for the fourth month in a row, suggesting companies are largely holding back on passing higher tariff costs through to consumers.
The consumer price index, excluding the often volatile food and energy categories, increased 0.1% from April, according to Bureau of Labor Statistics data out Wednesday. From a year ago, it rose 2.8%.
Goods prices, excluding food and energy commodities, were unchanged. New and used-car prices both declined, as did apparel. Meanwhile, services prices minus energy rose 0.2%, a deceleration from the prior month and reflecting a decline in airfares and hotel stays.
Treasuries rallied, the dollar declined and the S&P 500 opened higher after the report. Interest-rate swaps showed traders see a 75% probability that the Federal Reserve will cut borrowing costs by September.
The string of below-forecast inflation readings adds to evidence that consumers have yet to feel the pinch of President Donald Trump’s tariffs — perhaps because the most punitive levies have temporarily been on pause, or thanks to companies so far absorbing the extra costs or boosting inventory ahead of tariffs.
However, if higher tariffs set in, shielding consumers from those costs will become more difficult, which is partly why economists expect firms to raise prices more meaningfully in the coming months.
“The build-up of inventory in advance of the tariff hikes may be contributing to delayed pass through, while huge uncertainty in US trade policy may have affected the speed with which firms wish to adjust prices,” Brian Coulton, chief economist at Fitch Ratings, said in a note. “But a rise in core goods inflation in the months ahead still looks very likely.”

13 Jun 2025

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads were slightly tighter this week through Thursday but tensions are high this Friday morning as the market processes recent developments in the Middle East. The US Corporate Bond Index closed last week at 85 and it was at 84 when the market closed this Thursday. The market is generically 1-2 bps wider Friday mid-morning as we go to print and equities were also getting hit in a risk-off move related to Israel and Iran. The 10yr Treasury yield was solidly lower (-15bps) on the week, moving from 4.51% at the end of the last week to 4.36% through Thursday. Rates have moved steadily lower since May 21 when the 10yr closed at 4.60% but the current yield is still very close to the YTD average of 4.41%. Through Thursday, the Corporate Bond Index year-to-date total return was +3.14% while the yield to maturity for the Index closed the day at 5.14%.

Economics

The data was mixed this week but for the most part it continued to show that the U.S. economy has held up well in the face of uncertain trade policy. The Consumer Price Index showed an increase of +0.1% for May and +2.4% year over year. This CPI print was a benign one for inflation indicating that tariffs have not yet had the impact that many expected, although it is still early days. The US Producer Price Index was also a bit softer than some investors had feared showing an increase of +0.1% in May. Finally on Friday, consumer sentiment data showed improvement and inflation expectations also eased. Bottom line, it was a pretty good week for inflation.

Next week brings a busier calendar with most of the action taking place on Tuesday and Wednesday. Retail sales numbers for May will be released on Tuesday as well as data on import prices and industrial production. Housing starts will be released Wednesday morning and then the FOMC rate decision will occur that afternoon. We are firmly in the pause camp for this meeting and expect that the Fed will elect to hold its policy rate steady.

Away from economics, investors will continue to monitor the situation in the Middle East as Israel has carried out airstrikes against some of Iran’s nuclear and military facilities. Escalation could be negative for risk assets and it would likely send oil prices higher.

Primary Market

Issuance was just a bit light relative to expectations this week as companies priced $20.5bln of new debt while the street had been looking for $25bln. It wasn’t a terribly exciting week of issuance in our view as it was mostly comprised of less frequent, less attractive issuers with concessions that were not overly appealing. YTD issuance stands at $835.2bln just slightly ahead of 2024’s pace. Next week is expected to be on the quiet side with dealers looking for $15-$20bln of new supply concentrated on Monday and Tuesday. With the FOMC meeting on Wednesday and a market holiday for Juneteenth on Thursday, it adds up to a light week.

Flows

According to LSEG Lipper, for the week ended June 11, investment-grade bond funds reported another strong week of inflows at +$2.29bln. Total year-to-date flows into investment grade were +$16.3bln.

06 Jun 2025

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds are headed for the second consecutive week of gains after eight straight sessions of positive returns, the longest winning streak since August of last year. Yields still hovered near a three-month low and spreads near 300 basis points. The broad rally is spurred partly expectations that Federal Reserve may lower interest rates sooner than previously expected on weaker-than-expected data.
The gains are also fueled by steady cash intake by US high yield funds. These funds report an inflow of $1.5b for week ended June 4, the sixth successive week of cash inflows for these funds, according LSEG Lipper.
Steady cash inflows into high yield funds, attractive yields and relatively low risk premium as reflected in spreads, inundated the primary market with 13 borrowers selling $13.25b this week, the busiest since week ended May 10, 2024
Strong demand for higher yields is expected to drive supply in the coming weeks.
The broad rally in the US junk bond market spanned across ratings, with the exception of CCCs, the riskiest part of the market
BB yields also hovered near a three-month low and spreads closed at 180 basis points, posting gains for the eighth straight session, also the longest since August
Single B yields were at 7.32% and spreads at 295 pushing returns for eight straight sessions as the week comes to close

US Jobs Report Points to Gradual Moderation in Labor Market

US job growth moderated in May and the prior months were revised lower, indicating employers are cautious about growth prospects as they weigh the Trump administration’s economic policy.
Nonfarm payrolls increased 139,000 last month after a combined 95,000 in downward revisions to the prior two months, according to Bureau of Labor Statistics data out Friday. The unemployment rate held at 4.2%, while wage growth accelerated.
The payrolls figure, which was slightly better than expectations, helps alleviate concerns of a rapid deterioration in labor demand as companies contend with higher costs related to tariffs and prospects of slower economic activity. President Donald Trump’s decision to pause some of the more punitive import duties, including those on China, has helped lift sentiment among businesses as well as consumers.
“Employers have been ‘hoarding labor’ in the face of massive corrosive uncertainty,” Carl Weinberg, chief economist at High Frequency Economics, said in a note. “It costs money to fire workers, and we believe firms have been reluctant to lay off workers until they saw the extent of the Trump tariffs.”
Treasury yields rose, the S&P 500 opened higher and the dollar appreciated as traders trimmed bets the Federal Reserve will lower interest rates this year.
The labor market report wraps up a week of disappointing economic data that included a further increase in applications for jobless benefits and weaker services activity.
The advance in payrolls reflected strength at service providers, including health care and social assistance as well as leisure and hospitality.
At the same time, industries that are more exposed to tariffs flashed warning signs. Manufacturing payrolls dropped 8,000 last month, the most this year, while employment growth in transportation and warehousing rose slightly after declining in each of the prior two months. Employment at temporary-help agencies fell by the most since October.
The household survey, meanwhile, showed a 254,000 increase in the number of people who went from employed to out of work during the month. That was the biggest rise since the start of 2022.
Another major question for economists and policymakers is the extent to which Trump’s efforts to cut back on government spending will take a toll on employment. The federal government shed 22,000 jobs in May, the most since 2020.
Economists contend that at least half a million US jobs could be on the line as federal spending cuts spread to contractors, universities and others who rely on public funding.
“Cracks in the façade of labor market resilience are now starting to show and the longer the tariff uncertainty and government spending cuts continue the worse the labor market reports are bound to be,” Scott Anderson, chief US economist at BMO Capital Markets, said in a note.
The reports showed the size of the labor force shrank by the most since the end of 2023, helping keep the jobless rate steady even as more people became unemployed.
The participation rate — the share of the population that is working or looking for work — fell to a three-month low of 62.4% in May. The rate for those between the ages of 25 and 54, known as prime-age workers, also declined.
For the Fed, officials have indicated they’re in no rush to cut rates until they get further clarity on the impact the administration’s policies will have on the economy — including the labor market. Research by the New York Fed showed this week that as local companies begin dealing with higher costs from Trump’s trade policy, there were “some signs that the sharp and rapid increase in tariffs affected employment levels and capital investments.”

06 Jun 2025

Insight, Investment Grade Weekly, Weekly Insights Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads were little changed this week. The US Corporate Bond Index closed last week at 88 and it was at the same level when the market closed this Thursday. The 10yr Treasury yield was also nearly unchanged this week through Thursday moving from 4.40% lasts week to 4.39% through Thursday’s close. The benchmark rate had moved up to 4.48% by midday Friday on the back of a “decent” Friday morning payroll report. Through Thursday, the Corporate Bond Index year-to-date total return was +2.53% while the yield to maturity for the Index closed the day at 5.21%.

Economics

There was plenty of economic news this week. JOLTS kicked things off coming in slightly better than expectations. Data showed that job openings increased in April and the March number caught an upward revision. ISM manufacturing missed to the downside for the month of May, remaining in contraction territory. Construction spending posted a big miss to the downside, and was much lower than expected for the month of April. Lousy spring weather could have played a part but so too could tariff related fears, as total construction spending through the April report was down 1.5% relative to the same time period in 2024. ISM services also came in on the low side, and remained in contraction. The price component of ISM release increased however which could be a negative indicator with regard to future inflation readings. Finally on Friday we got some relatively good news for the labor market as the release showed that nonfarm payrolls for the month of May increased by 139k (126k survey) and the unemployment rate remained steady at 4.2%. There were some more bearish economists looking for a sub-100k print. This report likely gives the Fed some room to continue to delay its next cut. On the downside the job numbers for the two previous reports were revised to the tune of -95k which takes some shine off of the numbers from March and April. Taking it altogether it would be fair to say that the data this week continued to paint a picture of a slowing economy but one that is declining in a moderate fashion that looks like more of a soft-landing scenario at this juncture.

Across the pond, the ECB elected to cut its policy rate by 25bps. This makes 200bps of cumulative cuts for the European Central Bank since June of 2024. The ECB is now well ahead of the FOMC’s 100bps of cumulative cuts. Commentary from ECB president Lagarde indicated that central bank is near the end of its cutting cycle.

After two weeks of a bevy of economic releases, next week is on the lighter side, but there are a couple of highlights with CPI and PPI on Wednesday and Thursday, respectively. Looking further ahead, the June FOMC rate decision is on Wednesday the 18^th. Barring an unforeseen exogenous shock over the next dozen days it is all but certain that the Fed will elect to hold rates steady at its June meeting.

Primary Market

It was an active week for the IG primary market but total volume of $26.2bln fell short of the $30bln estimate. New issue concessions remained sparingly narrow as most deals in recent weeks have been priced to perfection. Dealers are looking for $25bln in new supply next week with most activity centered on Monday and Tuesday. Year-to-date issuance through this week stood at $814.7bln which was +4% ahead of 2024’s pace.

Flows

According to LSEG Lipper, for the week ended June 4, investment-grade bond funds reported their largest inflow of the year, a whopping +$4.11bln. Total year-to-date flows into investment grade were +$14.02bln.

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