US junk bonds kick off the fourth quarter on a somber note and are on track to end the eight-week gaining streak to post their biggest weekly loss in four months. The US junk bond rally faded as the market posted losses for the second consecutive session on Thursday.
The broad rally petered out amid growing tensions in the Middle East and because data showed US services activity expanded at the fastest pace since February 2023. That damped hopes for a big rate cut in November.
The losses this week spanned across ratings in the US high-yield market. BBs are also headed for their first weekly loss in nine and the biggest since early May
US junk bond yields climbed to a two-week high of 7.06% after steadily rising for four straight sessions this week. This will be the first increase in nine weeks
BB yields also rose seven basis points in four sessions to 5.89%, a more than two week high
CCCs also recorded losses for two sessions in a row and are poised to close the week unchanged. Yields, though, have dropped further to a new 29-month low of 10.31%. Spreads closed at a new 30-month low of 629 basis points
While the broad rally took a pause, still-attractive yields and tight spreads against the backdrop of resilient economy and easing monetary policy pulled borrowers into the US junk bond market
After a brief respite from the supply deluge in September, five borrowers sold near $5b in the primary market this week
Appetite for credit remained strong despite tight valuations, lower yields and elevated supply, Barclays strategists Brad Rogoff and Dominique Toublan wrote on Friday
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads traded within a narrow window this week and are 1 basis point better week over week. The Bloomberg US Corporate Bond Index closed at 90 on Thursday September 26 after closing the week prior at 91. The 10yr Treasury yield was higher this week through Thursday, up 5.5 basis points from where it closed last Friday. Through Thursday, the corporate bond index year-to-date total return was +5.22%.
Economics
There were some data points during the week to highlight. One of the most interesting under the radar prints was consumer confidence on Tuesday morning which fell the most in three years from the prior month’s reading. A closer look at the data showed that consumers were hesitant to spend with a labor market that has been showing signs of slowing amid persistently high costs of living. On Thursday there was a GDP release that showed that figure coming in at +3% for the second quarter. This was slightly better than the consensus estimate and economists are looking for an expansion of +2% in the third quarter. So, while GDP may be slowing, it is expected to remain in positive territory. The most anticipated release of the week was PCE and spending data on Friday morning. The Fed’s preferred inflation gauge and spending both rose at very modest levels which is likely to keep the Fed on track for another cut at its November 7th meeting, although there is still plenty of data that could sway them between now and then. Recall that there is no meeting in the month of October.
Next week is very similar to this week in that there are some meaningful data points but we will again have to wait until Friday for the main event which is the September payroll release.
Issuance
It was déjà vu all over again as issuance this week once again exceeded expectations. Companies brought $37bln of new bonds to market relative to the high end of estimates at $25bln. This capped off the busiest September on record at $168bln of monthly supply. The previous high-water mark was $164bln amid the pandemic borrowing binge of September 2020. Interestingly, according to sources compiled by Bloomberg, this was the fourth month this year where a record for monthly issuance volume was broken. The previous record setting months were January, February and July. More than 1.261 trillion of new debt has been priced in 2024 putting it a whopping +29% ahead of 2023’s pace. As we have written in previous commentaries it is somewhat of a goldilocks scenario for both borrowers and lenders (bond sellers and bond buyers) in that the prices paid are attractive for both parties. Absent any meaningful move in either direction for rates and/or spread we would expect this type of environment to persist although we could see a slowdown ahead of the November 5th presidential election.
Flows
According to LSEG Lipper, for the week ended September 25, investment-grade bond funds reported a net inflow of +$1.34bln. Short and intermediate investment-grade bond funds have seen positive flows 33 of the past 39 weeks. The total year-to-date flows into investment grade funds are +$55.1bln.
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.
US junk bonds rebounded cautiously after a four-day losing streak as spreads dropped just below 300 basis points and yields held steady at 7.03%.
Junk bond yields, prices and returns came under pressure after a barrage of new issuance took the week’s volume to $9b and September supply to more than $34b. The month’s supply is up 44% year-over-year
17 borrowers, the most since May, jumped into the market to sell $9b this week
The primary market was spurred by a half percentage-point cut in interest rates by the Federal Reserve.
Investors, still hungry for new paper, continued to flock to new issues
Barclays strategists Bradley Rogoff and Dominique Toublan expect to see attractive opportunities across the investment grade and high yield market despite tighter valuations after the beginning of the rate- cutting cycle in the US and Europe
The market rebounded on Thursday across the rating spectrum, ending the four-day decline
Barclays strategists Rogoff, Andrew Johnson and Corry Short expect CCCs to outperform through the year-end. Historically, when CCCs outperform through the third quarter, they tend to continue that trend through the year-end, they wrote on Friday
The Federal Reserve’s preferred measure of underlying US inflation and household spending rose modestly in August, underscoring a cooling economy.
The so-called core personal consumption expenditures price index, which excludes volatile food and energy items, increased 0.1% from July, according to Bureau of Economic Analysis data out Friday. On a three-month annualized basis, the measure rose 2.1%, in line with the central bank’s target.
Spending also rose 0.1% after adjusting for inflation. Nominal personal income increased 0.2% and the saving rate eased to 4.8%.
Treasury yields and the dollar fell on expectations the figures will keep the Fed on track for more rate cuts in the coming months while fueling ongoing debate over how big the reductions should be. The central bank opted for an outsize half-point cut this month to kick off its easing cycle, and investors are split over whether it will take a similar step or opt for a smaller move in November, according to futures.
“The modest rise in consumer inflation in August on its own provides strong reason for the Fed to continue easing the still restrictive monetary policy stance,” Kathy Bostjancic, chief economist at Nationwide, said in a note. “The tepid 0.1% rise in real consumer spending in August underscores that consumers are becoming more frugal in their spending and that the momentum in spending is slowing.”
Details of the August inflation numbers showed a broad cooling. Services prices excluding housing and energy rose 0.2% for a second month. Goods prices minus food and energy declined 0.2%, the most in three months.
The spending data also points to an economy that’s gradually slowing this year. Overall services spending, which makes up the bulk of household consumption, rose 0.2% in August, marking the smallest three-month gain since October 2023. Goods spending was unchanged following a solid advance in July.
Wages and salaries rose by the most since May. Still, growth in overall disposable income slowed, restrained by declines in proprietors’ income, interest income and dividend income.
Separate data published Friday by the Census Bureau showed the advance goods trade deficit narrowed in August to $94.3 billion — the least since March — while growth in wholesale and retail inventories moderated. Results of a Bloomberg survey showed forecasters expect inflation to return to the Fed’s 2% target by early next year.
Friday’s data follow annual revisions to gross domestic product data published Thursday by the BEA, which showed faster economic growth and more saving — fueled by higher incomes — than previously reported in 2022 and 2023.
The Bureau of Labor Statistics will provide a monthly update on hiring and unemployment for September on Oct. 4.
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.
US junk bonds are headed for their seventh weekly gain after amassing the biggest one-day returns in six weeks. The market is poised for the biggest weekly jump in four months, with returns of 0.86% so far this week.
Yields plunged, falling below 7% for the first time since April 2022, after Fed Chair Jerome Powell made an aggressive start to easing by lowering the interest rate by a half percentage point aimed at bolstering the US labor market.
The broad gains spanned across the US high yield market on expectations that the Federal Reserve will be able to engineer a soft landing. After the 50 basis point cut this week, Bank of America economists expect another 75 basis points cuts in the fourth quarter.
Also, Chair Powell instilled confidence in markets claiming that the aggressive 50 basis point cut was just “recalibration” and was not a sign of fundamental deterioration, Brad Rogoff and Dominique Toublan wrote on Friday.
CCCs, the riskiest tier of the US junk bond market, is on track for a 12th week of gains, the longest rallying streak since January 2021. The week-to-date returns are 1.84%, the most in a week in 2024, after notching up gains for 12 days in a row.
CCC yields tumbled 16 basis points on Friday to 10.51%, the lowest since May 2022, and is on course for a third week of declines after dropping 43 basis points this week.
CCC spreads tightened for the ninth consecutive session to 664, the longest tightening stretch in 20 months.
BB yields dropped to a new 27-month low and closed at 5.79%. Spreads closed at 183.
Primary activity gained new momentum as the soft landing narrative gained market credence against the backdrop of falling inflation and easing interest-rates.
The market has seen a flurry of new deals, bringing the September tally to $24b, up 34% already over last September and there one full week to go.
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.
Credit spreads moved meaningfully tighter this week with the index trading at its richest level since late July. The Bloomberg US Corporate Bond Index closed at 91 on Thursday September 19 after closing the week prior at 96. The 10yr Treasury yield drifted higher throughout the week, up 6 basis points from where it closed last Friday. The entire Treasury curve continued to steepen on the back of Wednesday’s policy rate cut by the FOMC. Through Thursday, the corporate bond index year-to-date total return was +5.58%.
Economics
The long awaited FOMC rate cut finally came to fruition this week. The Fed elected to kick things off with a 50bp cut. We would not call this a surprise, per se, but 25bps was what the market was looking for up until the middle of last week when the odds (Fed Funds futures) started to show an increasing likelihood of 50bps. The Summary of Economic Projections (SEP or Dot Plot) that was released at this meeting showed that a majority of FOMC members believe that there will be 50bps of additional cuts in 2024 and 100bps of cuts in 2025. The Fed does not meet in October so market prognosticators have extrapolated a 25bp cut at each of the November and December meetings. By all accounts it appears that the Fed was close to delivering a 25bp cut at its July meeting (there was no August meeting) and employment revisions and economic data since that time led them to “catch up” to the fact that they did not cut earlier by kicking things off with 50bps instead of 25bps. Remember that the September SEP is merely a forecast and does not necessarily reflect what will actually occur in the future. The SEP is only updated once every three months and simply reflects the median view of the FOMC members at a given point in time. That being said, 50bps of cuts in ’24 with an additional 100bps in ’25 sounds right to us given what we know today and what has been a resilient economy. We would also expect that at some point in 2025 the Fed may elect to end its balance sheet reduction (aka QT or quantitative tightening). The Fed kept its current plan in place for the time being where it will continue to allow $60bln of its balance sheet reduce each month. The current cycle of QT has reduced the Fed’s balance sheet from a peak of $9bln in mid-2022 to just above $7bln today, which is still elevated relative to pre-pandemic levels. The Fed’s balance sheet prior to March 2020 was just ~$4.25bln and prior to the 2008 financial crisis it was zero!
Next week is reasonably busy from an economic data standpoint. The highlights include consumer confidence, new home sales, GDP and the main event next Friday morning with core PCE.
Issuance
Issuance was light this week and underwhelmed relative to expectations as just $12.4bln of new debt was sold relative to the forecast of $25bln. In our view this “miss” can be explained by the mid-week Fed meeting and pull forward of issuance earlier this month as borrowers took advantage of a red-hot primary market in the days immediately following Labor Day. Dealers are calling for $20-$25bln of issuance next week. Over $131bln of debt has been priced so far in the month of September 2024. The five-year average for September is $136bln with the busiest year being 2020 when $164bln priced during the month.
Flows
According to LSEG Lipper, for the week ended September 18, investment-grade bond funds reported a net inflow of +$1.86bln. Short and intermediate investment-grade bond funds have seen positive flows 32 of the past 38 weeks. The total year-to-date flows into investment grade funds are +$53.8bln.
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.
US junk bonds are headed for their sixth straight week of gains, and yields still hover around two-year lows on expectations that the Federal Reserve will begin easing interest-rate policy in its meeting next week. Expectations swing between a 25 and a 50 basis point cut.
The gains spanned across ratings in the US high yield market, led by CCCs, the riskiest segment of the market. CCCs are on track for their 11th week of gains, the longest winning streak in more than three years, after rallying for seven sessions in a row. CCC yields are at 11.07%, the lowest since May 2022.
Expectations of easing monetary policy, combined with hopes of a soft landing, pulled US borrowers into the market. The primary market was crowded with 15 borrowers selling more than $11b this week, the busiest in four months. The busiest week this year is the week ended May 10 when the market priced $13b in new bonds
26 issuers sold bonds in the first two weeks of the month driving the September tally to $19b. The month already accounts for about 80% of last September’s volume
The broad gains across risk assets pushed junk bond gains across ratings
BB yields held steady at 6%. BBs are also set for their sixth weekly gains after rallying in two of the last four sessions
With demand for all-in yield remaining robust and fundamentals appearing solid, any widening in yields will be met with buyers, keeping spreads range-bound, Brad Rogoff and Dominique Toublan wrote on Friday
Fundamentals still look fine, with leverage in better shape than pre-COVID, Rogoff and others wrote
(Bloomberg) Core US Inflation Picks Up, Damping Odds of Outsize Fed Cut
Underlying US inflation unexpectedly picked up in August on higher prices for housing and travel, undercutting the chances of an outsize Federal Reserve interest-rate cut next week.
The so-called core consumer price index — which excludes food and energy costs — increased 0.3% from July, the most in four months, and 3.2% from a year ago, Bureau of Labor Statistics figures showed Wednesday.
Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.2% from the prior month and 2.5% from a year ago in August, marking the fifth straight month the annual measure has eased and dragged down by cheaper gasoline prices.
The BLS said shelter was “the main factor” in the overall advance.
While Wednesday’s reading won’t deter the Fed from cutting interest rates next week, it reduces the chance of an outsize reduction. Even so, policymakers have made it clear that they’re highly focused on softness in the labor market, which is more likely to drive policy discussions and decisions in the months ahead. They’ll also have more data to consider leading up to their November and December meetings.
In addition to shelter, the advance was boosted by airfares, apparel as well as daycare and preschool. Car insurance costs continued to rise, as did hotel stays.
Shelter prices, the largest category within services, climbed 0.5%, the most since the start of the year. That marked the second month of acceleration and defied widespread expectations for a downshift. Owners’ equivalent rent — a subset of shelter and the biggest individual component of the CPI — rose at a similar pace.
Excluding housing and energy, service prices advanced 0.3%, the most since April, according to Bloomberg calculations. While central bankers have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.
That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI does, partly why it’s trending closer to the Fed’s 2% target.
The PCE measure, which will be released later this month, draws from the CPI as well as certain categories within the producer price index.
Central bankers are increasingly paying attention to the labor side of their dual mandate amid emerging cracks in the job market. Hiring over the past three months is at the lowest since mid-2020, while job openings declined and layoffs rose in July. Anecdotally, employers have also indicated they’re becoming more selective in hiring, with some cutting hours and leaving vacancies unfilled.
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.
US junk bonds gained for the second straight session after data showed US companies added the fewest jobs since the start of 2021, reinforcing the broad trend that the labor market is cooling substantially. Yields tumbled seven basis points to a more than two-year low.
While the labor market is clearly slowing down, the US services sector expanded at a moderate pace, giving credence to the market consensus that the economy is still not headed toward a recession. The gains in the US high-yield market spanned across ratings, driving a crowded primary market.
Five US borrowers combined to sell a little more than $4b on Thursday, the busiest session in four weeks. US companies took advantage of the current window of opportunity ahead of Friday’s jobs data and the Federal Reserve decision later this month as 11 borrowers priced more than $7.5b in just three sessions so far this week
Most bonds sold this week were rated BB or in high single Bs. Four of the five priced at the tight end of talk.
The junk-market rebound began Wednesday after US job openings hit the lowest level since January 2021, boosting market participants’ bets on rate cuts
CCCs, the riskiest segment of the US corporate debt market, racked up the biggest gains in four weeks for the second day in a row and yields plummeted 25 basis points to a low of 11.25%, the lowest since May 6, 2022
BB yields dropped below 6% again to close at 5.99%, still near the two-year low of 5.97%
The slowing demand for workers, as reflected in US job-openings data and private payrolls, combined with shrinking US manufacturing activity, spurred bets on faster and bigger rate cuts
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.
Credit spreads did not change much this week though the index may finish the period a basis point tighter if the current trend holds through the end of the day on Friday. The Bloomberg US Corporate Bond Index closed at 92 on Thursday September 5 after closing the week prior at 93. The 10yr Treasury yield traded lower throughout the week, down 17 basis points from last week through Thursday’s close. The 2/10 Treasury curve closed with a positive slope on Wednesday evening for the first time since July 1 2022, snapping the longest streak on record for a 2/10s curve inversion. Through Thursday, the corporate bond index year-to-date total return was +4.71%.
Economics
The biggest data release during this holiday shortened week was Friday’s job report which came up slightly short of expectations keeping the FOMC on schedule to deliver the first policy rate cut on September 18. There are some meaningful prints next week with CPI, PPI and consumer sentiment data, but today’s employment report was the last large hurdle to clear to ensure a rate cut, in our view. Now it just comes down to a matter of whether the Fed will deliver 25 or 50 basis points with its first ease of the cycle. As we go to print Friday morning traders are split on the magnitude of a cut with Fed Funds Futures pricing a 100% chance of at least a 25bp cut and a 40% chance of a 50bp cut.
Issuance
Issuance was the big story of the week as US investment grade bond sales topped $80bln capping the fifth busiest week on record according to Bloomberg. The wild week that was featured a record breaking 29 borrowers tapping the market on Tuesday for a total of $43.3bln. Volume-wise Monday was the third busiest day on record. With $80bln of issuance in the first four trading days of the month it seems that we are well on our way to hitting the $125bln September estimate that dealers were looking for at the end of August. Next week syndicate desks are projecting $30-$35bln of issuance though we would not be surprised if one or two larger deals could push that total higher. Year-to-date issuance now stands $1.174 trillion which is +29% ahead of last year at this point in time, and 2023 was not a light year by any means.
Some readers may be wondering why issuance has been so robust this year even as we are on the precipice of a Fed easing cycle. There are a few reasons why the environment for IG issuance has been so strong. First, fund flows into the IG asset class have been solid thus far in 2024 which means a variety of investors have money to put to work. However, a large portion of IG investors (~70%) are institutional in nature and are not necessarily reliant on these flows. These are life insurance companies, property casualty insurance companies, pensions, banks and foreign institutional investors. These investors often have long term liabilities that they need to match against an income stream (asset liability matching) and high-quality investment grade bonds are a very good vehicle to help them accomplish these goals. There are also scores of investors in the IG market with long time horizons such as pensions and endowments. These investors always have funds to invest and this has been magnified by rebalancing. Due to the strong performance of equities the past few years these accounts have been allocating even more funds to IG credit as some of those equity gains find their way into corporate bonds. With real and nominal yields at elevated levels relative to the recent past institutional investors of all types have been very active buyers of IG credit and this is a trend that has been in place for the past 18 months. In recent months we have started to see increased interest from retail investors in the form of SMA/mutual fund/etf which is more reflected in fund flows and creates some additional demand for IG issuance. We believe this interest will only continue to increase as the Fed cuts its policy rate which will in turn lower the interest rate for money market accounts, high yield savings and other cash alternatives.
From the perspective of companies, a popular misconception is that they should wait for the Fed to cut before they borrow. This may be true at the very front end of the Treasury curve but when the Fed cuts its policy rate it typically has little effect on the 10yr or 30yr Treasury. The trading levels of these longer maturities are more reflective of investor expectations for inflation and economic growth. Many companies, especially large investment grade rated companies, are doing quite well operationally. Margins are at or near their peak for some companies and many companies are still increasing profit margins. Companies are no longer getting the free lunch they were getting back when they were borrowing in the low-rate era but their business models can easily support long term funding in the 4-6% range so they are not letting that level of interest expense interfere with their long-term plans for growth, expansion or M&A. This has made for an environment where investors are happy to lend at what they view as attractive interest rates and borrowers are happy to lock in funding at levels where the math still works for their business plans. The current environment for investment grade is about as close as you can get to a win-win for both investors and borrowers.
Flows
According to LSEG Lipper, for the week ended September 4, investment-grade bond funds reported a net inflow of +$3.3bln. Short and intermediate investment-grade bond funds have seen positive flows 30 of the past 36 weeks. The total year-to-date flows into investment grade funds are +$50.1bln.
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.
The High Yield Index didn’t have much going on over the past week
There were no new issues to speak of during the late summer lull. Month-to-date issuance remains at $18 billion, and Year-to-date issuance stands at $197 billion.
The Index spread tightened 4 basis points to 308 and the yield moved just 1 basis point lower to settle at 7.30.
(Bloomberg) Powell Says ‘Time Has Come’ for Fed to Cut Interest Rates
Chair Jerome Powell said the time has come for the Federal Reserve to cut its key policy rate, affirming expectations that officials will begin lowering borrowing costs next month and making clear his intention to prevent further cooling in the labor market.
“The time has come for policy to adjust,” Powell said last Friday (8/23/24) in the text of a speech at the Kansas City’s Fed’s annual conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
The Fed chief acknowledged recent progress on inflation, which has resumed moderating in recent months after stalling earlier in the year: “My confidence has grown that inflation is on a sustainable path back to 2%,” he said, referring to the central bank’s inflation target.
The Fed has held its benchmark rate in a range of 5.25%-5.5% — its highest level in more than two decades — for the last year in support of that goal, propping up borrowing costs across the economy.
Yet just as inflation has neared its target, cracks have appeared on the employment front, prompting several Fed officials to worry that high rates now pose a threat to the economy’s continued strength. Warning signals included a disappointing July jobs report that rattled financial markets.
“We do not seek or welcome further cooling in labor market conditions.” Powell said, adding that the slowdown in the labor market was “unmistakable.”
After being late to raise rates in response to an inflation surge during the Covid-19 pandemic, Powell’s remarks underscore how Fed officials are hoping to avoid another policy error.
“Our objective has been to restore price stability while maintaining a strong labor market, avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” Powell said. “While the task is not complete, we have made a good deal of progress toward that outcome.”
At their last gathering in July, the “vast majority” of Fed officials felt it would likely be appropriate to cut rates in September if economic data continued to come in as expected.
While inflation remains above the Fed’s goal, it has retreated markedly from its recent peak of 7.1% in 2022. The central bank’s preferred inflation gauge, the personal consumption expenditures price index, rose 2.5% in June from a year earlier. A separate measure of underlying consumer inflation cooled in July for a fourth straight month. Meanwhile, the unemployment rate ticked up last month, also for a fourth straight time, reaching 4.3%, and employers pulled back on the pace of hiring.
Powell said policymakers “will do everything we can to support a strong labor market as we make further progress toward price stability.”
At their gathering next month, Fed officials will release fresh set of economic projections and indicate where they anticipate their policy rate will be at the end of each year through 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.
Credit spreads exhibited little change during the week before Labor Day. The Bloomberg US Corporate Bond Index closed at 94 on Thursday August 29 after closing the week prior at the same level. The 10yr Treasury yield was slightly higher throughout this week, up 6 basis points from last week through Thursday’s close. Through Thursday, the corporate bond index year to date total return was +3.77%.
Economics
There were several big data releases this week but all were within the realm of expectations. Durable goods orders surprised to the upside on Monday but it was driven almost entirely by aircraft which can be volatile. GDP too came in slightly higher than expectations amid resilient consumer spending. Finally, on Friday morning we got the Fed’s preferred inflation gauge. It was a relatively good print for PCE that along with revisions showed that moderating inflation is trending in the right direction, inching closer to the Fed’s 2% target. Next week has some reasonably meaningful economic releases including the employment report on Friday which is the last big data point ahead of the next FOMC meeting on September 18.
Issuance
Companies priced just $2.05bln of new debt this week across a handful of small deals. Syndicate desks are predicting $125bln of new issue volume for the month of September. In 2023, borrowers priced $55bln during the first week of September and 2024’s haul could be similar, with a flurry of activity expected right out of the gate. The year-to-date issuance total now stands at $1.094 trillion.
Flows
According to LSEG Lipper, for the week ended August 28, investment-grade bond funds reported a net inflow of +$1.76bln. Short and intermediate investment-grade bond funds have seen positive flows 29 of the past 35 weeks. The total year-to-date flows into investment grade funds are +$46.81bln.
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.
