Category: Insight

17 May 2019

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

The tone in the credit markets was mixed this week.  The market felt heavy on Tuesday amid trade ramifications but by the time Thursday rolled around the tone was quite strong.  All told it looks as though we will finish the week relatively unchanged as far the spread on the index is concerned.  There are more negative headlines regarding China trade as we go to print on Friday which is leading to weakness in equity markets while Treasury’s are gaining.  The 10yr is modestly lower on the week and remains below 2.4% on Friday morning.


Just under $30bln in new corporate debt was brought to the market this week.  Demand for new issuance has been solid and thus concessions were low, in the neighborhood of 3-5 basis points for most deals.  Year-to-date corporate supply is up to $468bln, which lags 2019 issuance to the tune of -6.3% according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of May 9-May 15 were +$4.2bln.  This brings YTD IG fund flows to +$114bln.  2019 flows to this juncture are up 4.43% relative to 2018.

(Bloomberg) Bond Traders Need to Up Their Game as AI Systems Get Smarter

  • Money is pouring into artificial intelligence in bond markets, challenging bankers and investors to adapt their skills in everything from issuing to trading securities.
  • Fintech startup Nivaura is investing in technology to automate debt sales. Dutch bank ING Groep NV is improving systems to help traders buy and sell bonds, while AllianceBernstein Holding LP advanced its virtual assistant to identify notes that people miss.
  • After taking over stocks, computers are slowly overcoming resistance in one of the most technology-averse corners of financial markets. Bond traders are wary of a one-size-fits-all approach coming from equity markets, which are now largely automated. They say that human relationships are at the center of the market and clients want to talk through complex transactions.
  • AI has proved particularly useful in replacing manual tasks such as inputting data and executing small, liquid trades in markets such as currencies. It’s only just beginning in areas like corporate bonds, that traders call “high touch” for the traditional level of human involvement.
  • Still, proponents say tech is being used as a tool by people rather than a replacement for them and that it helps firms use human resources more efficiently.


 (Bloomberg) In a Tariff-Muddled World, U.S. Treasuries Send a Clear Message

  • Investors are wrestling with mixed U.S. data, underwhelming global growth, and an escalating trade war. While other asset classes have telegraphed optimism, sovereign debt is signaling a degree of caution, if not abject fear, about what comes next.
  • While U.S. stocks are barely down on the week through Thursday after collapsing on Monday, Treasury yields are decisively lower. Bund yields aresolidly sub-zero. Chinese sovereign debt is being heralded as a clear winner in the clash over cross-border commerce.
  • Another note of caution for Treasury bulls betting on an extension of the rally: expectations that the Federal Reserve is poised to ease – and perhaps materially – by the end of 2020 has helped juice the rally in longer-term debt. But patience – the central bank’s mantra – is almost definitionally incompatible with a proactively accommodative posture.
  • Even Minneapolis Fed President Neel Kashkari – arguably the most dovish member of the FOMC – does not think a so-called “insurance” rate cut is appropriate. A more hawkish member – Kansas City chief Esther George – thinks a rate reduction could fuel financial excesses.
  • If the market switched to betting the Fed will stay on hold this year, and if 10-year yields moved in lock-step with fed funds futures, then 10-year Treasuries would be north of 2.60% and trading closer to the 2019 highs than the trough.


(Bloomberg) Walmart Rallies on Plan to Pass on Cost of Tariffs to Consumers

  • Comparable sales for Walmart stores in the U.S. climbed 3.4% in the first quarter, its best for the period in nine years. Sales of groceries — Walmart’s biggest business — fueled the increase, and a later-than-usual U.S. flu season boosted health and wellness products. The shares rose as much as 4.1% Thursday in New York, the biggest intraday gain in almost three months.
  • Walmart’s response to potential higher levies will likely set the tone for other discount retailers, and its decisions on whether to pass along or absorb the additional costs will have ripple effects on American consumers. In its favor, Walmart’s clout with suppliers gives it more room to maneuver, and much of its food comes from U.S. sources, easing the impact.
  • “We will do everything we can to keep prices low, but increased tariffs lead to increased prices,” Chief Financial Officer Brett Biggs said in a Thursday morning interview. “It’s very item- and category-specific. There are some places where as we get tariffs, we will take prices up.” Finding alternative manufacturers “is one of a number of actions that our merchants are considering.”
  • Walmart’s response to potential higher levies will likely set the tone for other discount retailers, and its decisions on whether to pass along or absorb the additional costs will have ripple effects on American consumers. In its favor, Walmart’s clout with suppliers gives it more room to maneuver, and much of its food comes from U.S. sources, easing the impact.
  • “We will do everything we can to keep prices low, but increased tariffs lead to increased prices,” Chief Financial Officer Brett Biggs said in a Thursday morning interview. “It’s very item- and category-specific. There are some places where as we get tariffs, we will take prices up.” Finding alternative manufacturers “is one of a number of actions that our merchants are considering.”


17 May 2019

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.5 billion and year to date flows stand at $12.5 billion.  New issuance for the week was $4.0 billion and year to date HY is at $94.9 billion, which is +12% over the same period last year.


(Bloomberg)  High Yield Market Highlights

  • S. junk bonds gained 0.19% yesterday, the most in 7 weeks, as stocks rallied and the VIX fell. This morning’s equity retreat and the biggest fund outflows since December call into the question the sustainability of the move higher.
  • Junk bond yields dropped across ratings, with the biggest decline in 5 weeks, but nervous investors pulled cash out of retail funds for a second week
  • Lipper reported an outflow of $2.57b from U.S. high yield for week ended May 15, the most since December, amid trade war jitters
  • Berry Global is set to price a smaller than expected deal today
  • Three new deals priced yesterday. All priced at the lower end talk
  • Junk bond energy saw the best performance in 6 weeks after posting losses for more than 10 weeks, with 0.25% yesterday
  • High-yield energy YTD return was 8.67%
  • High-yield returns ex-energy also turned positive, with YTD at 8.086%
  • BBs at 7.99%, single-Bs 8.25%
  • CCCs at 7.964% YTD
  • Loans lag junk bonds, with a 5.67% YTD gain


(Reuters)  U.S. states accuse Teva, other drugmakers, of price-fixing: lawsuit 

  • S. states filed a lawsuit accusing Teva Pharmaceuticals USA Inc of orchestrating a sweeping scheme with 19 other drug companies to inflate drug prices – sometimes by more than 1,000% – and stifle competition for generic drugs, state prosecutors said on Saturday.
  • Soaring drug prices from both branded and generic manufacturers have sparked outrage and investigations in the United States. The criticism has come from across the political spectrum, from President Donald Trump, a Republican, to progressive Democrats including U.S. Senator Elizabeth Warren, who is running for president.
  • The 20 drug companies engaged in illegal conspiracies to divide up the market for drugs to avoid competing and, in some cases, conspired to either prevent prices from dropping or to raise them, according to the complaint by 44 U.S. states, filed on Friday in the U.S. District Court in Connecticut.
  • “The allegations in this new complaint, and in the litigation more generally, are just that – allegations,” Teva said in a statement. “Teva continues to review the issue internally and has not engaged in any conduct that would lead to civil or criminal liability.”
  • “Apparently unsatisfied with the status quo of ‘fair share’ and the mere avoidance of price erosion, Teva and its co-conspirators embarked on one of the most egregious and damaging price-fixing conspiracies in the history of the United States,” the complaint said.


(Bloomberg)  Looming U.S. Junk Bond Risk May Shrink With Fed’s Help 

  • One of the biggest risks in the junk bond market is showing signs of diminishing, with help from the Federal Reserve.
  • Nearly a third of the $1.2 trillion U.S. high-yield market matures in the next four years, a record high proportion, according to Barclays Plc strategists led by Bradley Rogoff. Junk-rated companies have to refinance that debt, pay it off, or face bankruptcy.
  • They have years to sort out that risk, but many are doing it now: companies have issued more than $80 billion of bonds this year that listed refinancing as one of the uses of proceeds, according to data compiled by Bloomberg, accounting for more than 70% of issuance this year.
  • “Companies are extending maturities out, and that’s healthy,” said Scott Roberts, head of high-yield debt at Invesco Ltd. Refinancing is a better use of debt than buying back shares, he added. “I’ve seen frothy before and this is not it.”
  • Corporations have ample incentive to deal with future debt maturities soon: on average they can reduce interest costs by issuing securities at current yields, the Barclays strategists said. Those relatively low borrowing costs are in part because of the Fed, which has paused its rate hikes, spurring money managers to pile into junk bonds in search of yield. Even with recent declines in high-yield securities, the debt has gained 8.3% this year through Friday, according to Bloomberg Barclays index data.
  • “I feel good about this high-yield market and we are trying to push issuers to take advantage of it,” said Richard Zogheb, global head of debt capital markets at Citigroup Inc. “Investors are so excited now that the underlying rate environment is more dovish, and that’s really good news for high-yield borrowers.”
  • Investment bankers say companies are taking notice of the opportunities to issue, and not just for refinancing. Corporations sold around $12 billion of U.S. junk bonds last week, the highest level in around 20 months, according to data compiled by Bloomberg.


(Bloomberg)  China Downplays Chances for Trade Talks While U.S. Plays ‘Little Tricks’

  • China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs, while the government said stimulus will be stepped up to buttress the domestic economy.
  • Without new moves that show the U.S. is sincere, it is meaningless for its officials to come to China and have trade talks, according to a commentary by the blog Taoran Notes, which was carried by state-run Xinhua News Agency and the People’s Daily, the Communist Party’s mouthpiece. The Ministry of Commerce spokesman said Thursday he had no information about any U.S. officials coming to Beijing for further talks.
  • The indications that negotiations are paused will focus attention on the next opportunity for Presidents Xi Jinping and Donald Trump to meet — at the Group of Twenty meeting in Japan next month. Their meeting in Argentina in December last year put negotiations back on track, only for them to fall apart again this month in Washington.
  • S. Treasury Secretary Steven Mnuchin said this week that American officials “most likely will go to Beijing at some point” in the near future to continue trade talks, before later saying he has “no plans yet to go to China.”
10 May 2019

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

Amid a deluge of new issue supply and a weaker macroeconomic backdrop, we can finally say that the investment grade credit markets experienced a week of notable spread widening.  The spread on the corporate index closed Thursday at 116, 4 basis points wider on the week and 7 basis points off the lows from mid-April.  China trade headlines have dominated the tape this week which has led to volatility in the equity markets that has subsequently spilled over into the credit markets.  The impact to corporate credit has been relatively muted thus far but we would welcome short term bouts of volatility in our market as that has the potential to allow us to be more opportunistic in our purchases for the portfolios we manage.


$45.65bln of new corporate debt was issued this week led by Bristol-Myers and IBM.  On Tuesday, BMY printed $19bln in new bonds which at the time was the largest deal of 2019 and the 10th largest of all time.  BMY was bested by IBM a mere 24 hours later as Big Blue printed $20bln in new debt to fund its purchase of Red Hat, tied for the 7th largest bond deal of all time.  It is worth noting that, although CAM is a regular participant in the new issue market, we did not see value in either of these deals so we remained on the sidelines awaiting better opportunities.  $51.9bln of new corporate debt has been priced in the month of May and the year-to-date tally of new issuance is up to $439bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of May 2-May 8 were +$3.3bln.  This brings YTD IG fund flows to +$103.614bln.  2019 flows to this juncture are up 4% relative to 2018.

Bloomberg) IBM Sells $20 Billion of Bonds as Market Defies Trade Drag

  • International Business Machines Corp. sold $20 billion of bonds, propelling the corporate-debt market to its busiest week in at least eight months despite turbulence across asset classes worldwide.
  • The senior unsecured bonds will help fund the computer-services giant’s acquisition of Red Hat Inc. The longest portion of the offering, a 30-year security, will yield 1.45 percentage points more than Treasuries, after initial talk of around 1.55 percentage points, according to a person with knowledge of the matter, who asked not to be identified as the details are private.
  • The order book for IBM’s eight-part bond sale was just shy of $40 billion, suggesting some investor indigestion following Tuesday’s offering from Bristol-Myers Squibb Co. The drugmaker managed to sell $19 billion of bonds, one of the biggest sales of the year.
  • The U.S. investment-grade corporate bond market reached record highs on Tuesday, shrugging off the trade war fears that have weighed on stocks and oilthis week. High-grade issuance this week could top $40 billion, the most since September, according to data compiled by Bloomberg. High-yield issuers are also taking advantage of the frenzy — they collectively had their busiest day in three months.
  • More big bond offerings are coming. T-Mobile US Inc. and Fidelity National Information Services Inc. are expected to issue debt in the coming weeks to fund their respective acquisitions.
  • Companies are tapping the bond market to finance acquisitions after having shied away from that kind of issuance for much of the year. Just over $60 billion of investment-grade corporate debt was sold for that purpose in the first four months of the year, including about $2 billion in April, according to data compiled by Bloomberg. That’s out of $445.4 billion of total issuance over that period. Companies instead focused on selling bonds to refinance maturing securities and fund capital expenditure, among other corporate uses.
  • Bond-sale volume linked to acquisitions is increasing now in part because borrowing has grown even cheaper: the average high-grade company bond yielded 3.6% on Tuesday, according to Bloomberg Barclays index data, close to its lowest level since early 2018. The debt has gained 5.9% this year.



(Bloomberg) Boeing Sends 737 Max to Brand Rehab to Avoid Fate of Ford Pinto

  • Boeing Co.’s 737 Max is about to join the list of brands trying to come back from ignominy.
  • Analysts are digging into decades-old safety scares for clues to the future of the jetliner — and Boeing’s finances. There’s the Chevrolet Corvair rollovers that launched Ralph Nader as a consumer advocate in the 1960s, gas-tank explosions that sank Ford Motor Co.’s Pinto in the 1970s, and the Tylenol poisonings of 1982 that spurred tamper-proof packaging.
  • But there’s little precedent for the tangle of safety, regulatory and financial issues buffeting a workhorse jet that’s vital to sustaining the surge in global air travel. After two crashes of the aircraft model in five months and a grounding that’s nearing the two-month mark, some nervous passengers are vowing to avoid the Max. Boeing has added to the mess by not fully explaining the apparent flaws in the best-selling jet in company history.
  • Longtime Boeing watcher Nick Cunningham said he’s starting to wonder if “this has become too serious and too protracted for the Max to escape unscathed.” The accidents in Indonesia and Ethiopia killed 346 people. Nader’s own grand niece was among the victims.
  • The longer the crisis drags on, the greater the risk that the cumulative effect “will have acted to permanently lock it into people’s memories,” said Cunningham, founding partner at Agency Partners.
  • Boeing is finalizing an update to software linked to both crashes, which it will submit to the Federal Aviation Administration in a crucial step toward getting the plane back in the air. A May 23 summit of global regulators “may lay out a path towards certifying fixes and removing the grounding,” Morgan Stanley analyst Rajeev Lalwani said in a note Thursday.
  • Rebuilding consumer confidence is an urgent priority, as the Chicago-based company works with airlines to prepare resuming flights of the 737 model over the next few months. Boeing must also win over pilots, flight attendants and fractious regulators.


(Bloomberg) Chevron’s Mr. Discipline Sizes Up Costs as Anadarko Bid Ends

  • Chevron Corp. Chief Executive Officer Mike Wirth’s decision to abandon his $33 billion offer for Anadarko Petroleum Corp. bolsters his reputation as one of the oil industry’s consummate financial disciplinarians.
  • Anadarko was looking for Chevron to beat or at least match Occidental Petroleum Corp.’s $38 billion proposal, people familiar with the matter said Wednesday. But Wirth, whose deputies already had held integration meetings with counterparts at Anadarko, declined to escalate the bidding war and bowed out on Thursday.
  • “Make no mistake about it, we had the financial capacity to easily outbid Occidental,” Wirth said in an interview. “But an increased offer would have eroded value to our shareholders and would have diminished returns on our capital. We’re serious about being disciplined.”
  • The decision to cede Anadarko to a rival one-fifth of its size would have been unthinkable even five years ago, in the heady days of $100 a barrel oil when the world’s largest energy companies were focused on growth at almost any cost. But the crude price collapse, ascendance of of shale and a recognition that big deals often destroy shareholder value has changed Big Oil’s mindset.



10 May 2019

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.7 billion and year to date flows stand at $16.2 billion.  New issuance for the week was $12.8 billion and year to date HY is at $90.8 billion, which is +14% over the same period last year.


(Bloomberg)  High Yield Market Highlights

  • S. junk issuers continue to rush in as if the window is closing, pricing another $3 billion in bonds yesterday despite secondary market weakness. This week’s $12 billion total makes it the busiest since September 2017.
  • The high-yield index fell 0.22%, the biggest decline since March 8 and the fourth straight day of losses, as stocks fell and VIX rose
  • Yesterday’s new issuance was oversubscribed as investors fought for allocation
  • Junk bond returns dropped across ratings for 4 straight sessions, the first time since early March, with the exception of BBs which turned positive one day of the week
  • Yields surged across the risk spectrum and saw the biggest jump in almost seven weeks
  • BB yields rose to a more than 3-month high, saw biggest rise in 12 weeks
  • Energy returns were negative for the 10th session with a 1-day break on Friday last, the longest streak since December 13-26
  • Energy return YTD 9.040%, ex-energy 8.19%
  • CCCs lost most, falling 0.23%
  • CCCs are up 8.6% YTD
  • Junk bond returns are 8.31% YTD
  • BBs have returned 8.03%, single-Bs 8.41%
  • Loans have returned 5.61% YTD


(Business Wire)  AmeriGas Reports Second Quarter Results

  • GAAP net income of $219.1 million, compared with $191.8 million in the prior-year period; adjusted net income of $203.1 million, compared with $222.7 million in the prior-year period
  • Adjusted EBITDA of $290.3 million, compared with $309.5 million in the prior-year period
  • AmeriGas expects to be at the low end of its fiscal 2019 Adjusted EBITDA guidance range of $610 million – $650 million
  • Hugh J. Gallagher, president and chief executive officer of AmeriGas, said, “Overall, AmeriGas experienced weather that was colder than the prior year, however our results were impacted by warm weather during the critical heating months in the southeastern U.S. During the quarter, we remained focused on our growth drivers and built on our history of solid volume and customer additions in our Cylinder Exchange and National Accounts programs. Our team did a great job managing expenses throughout the entire heating season and we continue to look for additional opportunities to improve efficiencies. AmeriGas remains on pace to deliver adjusted EBITDA towards the low end of its guidance range.
  • While degree days for the quarter were 4% colder than normal and 5% colder than last year, January and February were a combined 17% warmer than normal in the southeastern U.S.
  • Retail volumes sold decreased by 4% primarily due to warm weather in the southeastern U.S. during critical heating months


(PR Newswire)  TransDigm Group Reports Fiscal 2019 Second Quarter Results 

  • During the quarter, on March 14, 2019, TransDigm completed the acquisition of Esterline Technologies Corporation, a supplier of products to the global aerospace and defense industry.
  • Also during the quarter, on February 13, 2019TransDigm completed the private offerings of $4.0 billion aggregate principal amount of 6.25% Senior Secured Notes due 2026 and $550 million aggregate principal amount of 7.50% Senior Subordinated Notes due 2027.
  • The net proceeds of the $4.0 billionsecured notes were used to both fund the purchase price of the Esterline acquisition and to allow for substantial near term financial flexibility.
  • The net proceeds from the $550 millionof subordinated notes were used to redeem all of the Company’s outstanding senior subordinated notes due 2020 and replaced them with notes due 2027.
  • These events above significantly impacted certain year-over-year comparisons.
  • Net sales for the quarter rose 28.2%, or $262.8 million, to $1,195.9 millionfrom $933.1 million in the comparable quarter a year ago. Organic sales growth was 11.0%. Acquisition sales contributed $160.4 million, of which $122.0 million were from Esterline for the 17 days of ownership in the quarter.
  • EBITDA for the quarter increased 15.9% to $509.4 millionfrom $439.4 million for the comparable quarter a year ago.  EBITDA As Defined for the period increased 23.5% to $571.8 million compared with $463.1 million in the comparable quarter a year ago.  EBITDA As Defined as a percentage of net sales for the quarter was 47.8%. Esterline contributed $26.7 million of EBITDA As Defined in the current quarter. Excluding Esterline,  EBITDA As Defined as a percentage of net sales for the quarter was 50.8%.
  • “We are pleased with our second quarter results and the strength of our base business,” stated Kevin Stein, TransDigm Group’s President and Chief Executive Officer. “Organic revenue growth was 11% in the quarter driven by good growth across all major end markets. Our core EBITDA As Defined, excluding the dilutive impact of Esterline and the acquisitions completed in fiscal 2018, continued to expand sequentially and over the prior year period to 51.5% in the quarter.
  • In addition to the focus on our base business, it was a busy quarter with the completion of the Esterline acquisition, our largest acquisition to date. Our second quarter results include $122 millionof revenue and $27 million of EBITDA As Defined reflecting 17 days of Esterline ownership. Please note the implied Esterline margin from this short period is higher than should be expected for the balance of the fiscal year primarily due to an elevated level of shipments at quarter end.”
  • He continued, “Lastly, our decision in the quarter to borrow substantial additional funds impacted our quarterly net income, but we believe the significant near term flexibility and attractive cost will serve us well in the future.”


(Bloomberg)  EQT and Digital Colony Agree to Buy Zayo for $14.3 Billion

  • Fiber network owner Zayo Group Holdings Inc. has agreed to be acquired by Digital Colony Partners and EQT Partners for $14.3 billion including debt in a deal that will
    take the fiber-network owner private.
  • The deal values Zayo at $35 per share in cash and includes $5.9 billion in debt, Zayo said in a statement Wednesday, confirming an earlier Bloomberg report.
  • Zayo struggled through organizational changes and concerns that the market for fiber lines was becoming overcrowded. In March, Zayo announced that they were evaluating strategic alternatives.
  • “I am confident this partnership with EQT and Digital Colony will empower Zayo to accelerate its growth and strengthen its industry leadership,” Chief Executive Officer Dan Caruso said in the statement.
  • The transaction is scheduled to close in the first half of 2020, pending regulatory clearance and approval by Zayo shareholders.


(Bloomberg)  Investors Suing JPMorgan May Redefine the Leveraged Loan Market

  • A group suing JPMorgan Chase & Co. and other Wall Street banks over a loan that went sour four years ago is alleging the underwriters engaged in securities fraud. If successful, the lawsuit could radically transform the $1.2 trillion leveraged lending market.
  • The defendants say there’s one key problem — unlike bonds, loans aren’t securities. As a result, they’ve filed a petition asking the court to dismiss the suit on those exact grounds.
  • “There are absolutely enormous market consequences if a court determines that leveraged loans are securities,” said J. Paul Forrester, a partner at law firm Mayer Brown who’s not involved in the litigation. “Leveraged loans and lenders would be potentially subject to the same offering and disclosure requirements as securities and would face the same regulatory oversight and enforcement consequences.”
  • The suit stems from a $1.8 billion loan that JPMorgan and others arranged for Millennium Health LLC — then owned by private-equity firm TA Associates — and sold to investors in 2014. Within a matter of months, lenders saw the value of their loan plunge as the company disclosed that federal authorities were investigating their billing practices. Millennium agreed to pay $256 million to resolve the probe, and would go on to file for bankruptcy.
  • JPMorgan knew U.S. officials were investigating Millennium when it sold the loan, but didn’t tell investors who were about to buy the debt, Bloomberg reported in 2015. The bankers did not provide the information because Millennium told them it wasn’t material at the time.
  • “Styled as ‘leveraged loans,’ the debt obligations that defendants sold to the investors back in April 2014 have all the attributes of and, in fact, constituted credit agency-rated and tradeable debt ‘securities,’” the lender trustee wrotein the 2017 suit. As such, the defendants are liable “for sponsoring the materially false presentation of Millennium’s financial condition and business practices.”
  • “The sophisticated entities that lent Millennium money now try to classify the loan as a ‘security’ and the loan syndication as a ‘securities distribution’ in an attempt to manufacture a securities fraud claim where none is viable, and to avoid the express language of the contracts into which they willingly entered,” JPMorgan and Citigroup wrote in a memorandum last month.
03 May 2019

CAM High Yield Weekly Insights

CAM High Yield Market Note



Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.07 billion and year to date flows stand at $16.9 billion. New issuance for the week was $5.0 billion and year to date HY is at $77.9 billion, which is +1% over the same period last year.


(Bloomberg) High Yield Market Highlights


  • U.S. junk bond returns turned negative across all ratings yesterday, with the index falling most since March 8 as stocks and oil prices fell. Equity futures rose this morning as bright spots appeared in corporate earnings ahead of jobs data.
  • Yields jumped across the risk spectrum, marking the biggest increase in eight weeks as oil closed at a 4-week low
  • Yields had been at 12-month lows
  • Energy sector yields hit a 3-week high and returns were negative for 6 straight sessions, for the first time since mid-December
  • Despite this, investors made a beeline to new bonds in the primary market
  • U.S. high-yield funds reported a modest inflow this week ended
  • Flows turned negative last week, for the first time time in seven weeks
  • Junk bond returns dropped to 8.69% YTD, still the best since 2009 for the comparable period
  • Energy returns dropped below 10% to close at 9.61% after six consecutive sessions of negative returns
  • CCC were still on top of the pack, with 9.175%
  • BBs stood at 8.75% and single-Bs at 8.378%
  • Loans at 5.746% and IG at 5.367% 


  • (Bloomberg) The Junkiest Corporate Bonds Divide Wall Street
  • Bank of America sees a further “melt-up” in triple-C debt, while Citigroup urges caution.
  • Triple-C debt has returned 9 percent this year, according to Bloomberg Barclays data, compared with a 2.8 percent gain for the aggregate bond index. At first glance, that seems pretty good. But the broad high-yield index, which includes less risky borrowers, is up almost the same amount, at 8.6 percent.
  • Ordinarily, such a return on the broad index would equate to gains of close to 15 percent for triple-C debt, according to strategists at Citigroup Inc. “The inability of triple-C credits to materially outperform has puzzled many investors,” Michael Anderson and Philip Dobrinov wrote. This means one of two things: Either triple-C securities are cheap, or bond traders aren’t fully buying into the risk-on environment.
  • Bank of America Corp in an April 26 report, strategists Oleg Melentyev and Eric Yu made a bold proclamation: “A further CCC melt-up still appears inevitable to us.”
  • The two sides: Those who favor triple-C debt argue that there’s a bit more juice left to squeeze out of this high-yield rally, even if the rebound from last year looks extreme and unsustainable. The bearish strategists are cautious about wading into triple-C debt and break down which kinds of companies make up the index. According to Citigroup, about half is health-care, energy, retail and communications companies — precisely those that have too much leverage or face a much-changed business climate from even a few years ago.

(Company Filing) Western Digital Announces Financial Results for Third Quarter Fiscal Year 2019


  • Western Digital Corp reported revenue of $3.7 billion for its third fiscal quarter ended March 29, 2019. The operating loss was $394 million with a net loss of $581 million. Excluding certain non-GAAP adjustments, the company achieved non-GAAP operating income of $186 million and non-GAAP net income of $49 million. Both the GAAP and non-GAAP results include lower of cost or market inventory charges of approximately $110 million in cost of revenue, primarily related to certain flash memory products that contain DRAM components.
  • In the year-ago quarter, the company reported revenue of $5.0 billion, operating income of $914 million and net income of $61 million. Non-GAAP operating income in the year-ago quarter was $1.3 billion and non-GAAP net income was $1.1 billion.
  • The company generated $204 million in cash from operations during the third fiscal quarter of 2019, ending with $3.8 billion of total cash, cash equivalents and available-for-sale securities. The company returned $146 million to shareholders through dividends. On February 14, 2019, the company declared a cash dividend of $0.50 per share of its common stock, which was paid to shareholders on April 15, 2019.
  • “Market conditions have generally been consistent with our expectations, and while the business environment remains soft, there are initial indications of improving trends,” said Steve Milligan, chief executive officer, Western Digital. “Our expectation for the demand environment to further improve for both flash and hard drive products for the balance of calendar 2019 is largely unchanged. We are executing well on enhancing our product portfolio, driving technology advancements, rightsizing our factory production levels and lowering our cost and expense structure, all of which position us to emerge stronger as market conditions improve.”

(Business Wire) The GEO Group Reports First Quarter 2019 Results


  • GEO reported first quarter 2019 net income attributable to GEO of $40.7 million compared to $35.0 million for the first quarter 2018. GEO reported total revenues for the first quarter 2019 of $610.7 million up from $564.9 million for the first quarter 2018. First quarter 2019 results reflect a $1.5 million loss on real estate assets. Excluding this loss, GEO reported first quarter 2019 Adjusted Net Income of $42.2 million.
  • GEO reported first quarter 2019 Normalized Funds From Operations (“Normalized FFO”) of $60.3 million compared to $52.6 million in the first quarter 2018. GEO reported first quarter 2019 Adjusted Funds From Operations (“AFFO”) of $80.3 million, compared to $69.8 million in the first quarter 2018.
  • George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “We are pleased with our strong quarterly financial and operational performance, as well as, our improved outlook for the balance of the year. We have taken important steps to reactivate our idle capacity, and we are proud of the continued success of our GEO Continuum of Care enhanced rehabilitation and post-release programs. We remain focused on effectively allocating capital to enhance long-term value for our shareholders, and we believe we will continue to have access to cost-effective capital to support the growth and expansion of our high-quality services.”    
26 Apr 2019

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

The investment grade credit market traded sideways this week as the OAS on the corporate index looks to finish relatively unchanged.  Spreads continue to remain near their tightest levels of 2019 which has been the case since mid-April.  It was a busy week for earnings and it was feast or famine for some large-cap firms.  Companies like Microsoft and Amazon produced some exceptional results while on the other hand Intel and 3M had lackluster earnings prints.  On the Treasury front, rates are lower by 3-5 basis points across the curve on the back of an economic release that showed inflation measures are slowing.

It was an extremely quiet week for corporate issuance as companies brought just $5.65bln of new corporate bonds.  Earnings blackout periods will likely continue to have an impact on issuance for the next several weeks.  $50.8bln of new corporate debt has been priced in the month of April and the year-to-date tally of new issuance is up to $371bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of April 18-April 24 were +$6.7bln, which was the second largest weekly inflow thus far in 2019. This brings YTD IG fund flows to +$97.6bln.  2019 flows to this juncture are up 3.8% relative to 2018.



(Bloomberg) A 48-Hour Reporting Delay Could Be Coming for Corporate Debt

  • The Financial Industry Regulatory Authority will likely test the market impact of delaying the disclosure of large corporate bond trades after some of the biggest investors argued that such a move would improve liquidity.
  • Finra last week proposed running a pilot program that would give traders 48 hours before having to reveal their so-called block trades to other investors. The effort would allow the industry-funded brokerage regulator, which is overseen by the U.S. Securities and Exchange Commission, to evaluate how delayed transparency might affect corporate bond trading.
  • Current rules require that block trades be reported within 15 minutes. Brokers and investment firms such as BlackRock Inc. and Pacific Investment Management Co. have long said that such rapid disclosure can make it harder for a dealer to offload securities it’s bought, because market participants know exactly what was bought and at what price.
  • The idea for the pilot was suggested by a group of industry executives that advises the SEC. The Securities Industry and Financial Markets Association, Wall Street’s biggest trade group, has expressed support for the proposed test as did JPMorgan Chase & Co. and Eaton Vance, according to Finra. At the same time, the regulator said that two market makers for exchange-traded funds have expressed concern that the changes would reduce price transparency.


(Bloomberg) Wall Street Said to Accelerate Shake-Up in Market for New Bonds

  • Wall Street is moving closer to modernizing the clubby $2 trillion market for new corporate bond issues while seeking to retain control of a lucrative business that’s being eyed by the tech sector.
  • A group of banks led by Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., has set up a company and appointed a chief executive officer to develop an electronic system for investors to request allocations of new debt, according to people familiar with the matter.
  • Other banking heavyweights including Barclays Plc, BNP Paribas SA, Deutsche Bank AG, Goldman Sachs Group Inc. and Wells Fargo & Co. have also joined the founders in backing the platform that was originally conceived more than a year ago, the people said, asking not to be identified because it isn’t public.
  • Bloomberg talked to 10 people familiar with the initiative. While many of its details are yet to be finalized, Bloomberg reported a year ago the banks plan to focus initially on U.S. investment-grade bonds.
  • The new system, dubbed Project Mars, aims to modernize the process of buying new corporate bonds, streamlining communication in a market that still relies on phone calls, instant messaging and emails to handle billions of dollars in orders from investors.
  • Investors have pushed banks for years to streamline the market and make it more transparent amid mounting frustration at current practice where they often over-order to secure a quota of bonds that’s close to what they want. Bond allocation has become a high-stakes game, as demonstrated by Saudi Aramco’s recent $12 billion deal which saw investors place orders for more than $100 billion.


(Bloomberg) Ford Shares Surge After Q1 Earnings Beat as U.S. Sales Offset Global Weakness

  • Ford Motor Co. shares were traded sharply higher Friday after the carmarker posted stronger-than-expected first quarter earnings thanks to a surge in U.S. demand for its iconic pick-up trucks that offset weakening international demand.
  • Ford said earnings for the three months ending in March rose nearly 52% from the same period last year to a forecast-beating 44 cents a share even as total revenues edged 3.9% lower to $40.34 billion as key markets in China continue to weaken.
  • S. sales, however, held steady at $25.4 billion. with healthy demand for trucks and SUVs in the company’s home market providing $2.2 billion of its overall $2.4 billion in operating earnings for the quarter.


(Bloomberg) U.S. Growth of 3.2% Tops Forecasts on Trade, Inventory Boost

  • S. economic growth accelerated by more than expected in the first quarter on a big boost from inventories and trade that offset slowdowns in consumer and business spending, bolstering hopes that growth is stabilizing after its recent soft patch.
  • Gross domestic product expanded at a 3.2 percent annualized rate in the January-March period, according to Commerce Department data Friday that topped all forecasts in a Bloomberg survey calling for 2.3 percent growth. That followed a 2.2 percent advance in the prior three months.
  • But underlying demand was weaker than the headline number indicated. Consumer spending, the biggest part of the economy, rose a slightly-above-forecast 1.2 percent, while business investment cooled. A Federal Reserve-preferred inflation measure, the personal consumption expenditures price index excluding food and energy, slowed to 1.3 percent, well below policy makers’ 2 percent objective.

(Bloomberg) Occidental’s $38 Billion Anadarko Offer Starts Permian Fight

  • After being rebuffed several times, Occidental Petroleum Corp. on Wednesday made public a $38 billion offer to buy Anadarko Petroleum Corp., seeking to break up a proposed takeover by Chevron Corp. The $76 per share cash-and-stock bid for The Woodlands, Texas-based oil and natural gas producer is 20 percent more than Chevron’s $33 billion April 12 agreement.
  • For Occidental, which has a market value of about $46 billion, the acquisition would be its largest ever and the biggest purchase of an oil producer anywhere in at least four years. It would pull together two second-tier oil and natural gas producers, as opposed to Chevron’s bid to create another “ultramajor” to rival Exxon Mobil Corp. It would require Anadarko to pay a $1 billion breakup fee to Chevron.
  • In an email, Chevron spokesman Kent Robertson said the company was “confident the transaction agreed to by Chevron and Anadarko will be completed.”
  • A tie-up would help Occidental maintain its leading position in the Permian Basin of West Texas and New Mexico, where it currently faces being overtaken by Chevron, which has ambitious growth plans for the region. The Permian is the world’s fast-growing oil major patch and has helped to turn the U.S. into a net exporter, also making it a bigger producer than Saudi Arabia.
  • Chief Executive Officer Vicki Hollub said in a Bloomberg Television interview that the offer is the same it made to Anadarko in January 2018. The company has also made three bids since late March, she said Wednesday in a letter to Anadarko’s board of directors. Occidental said it has completed its due diligence on the deal and has financing lined up with Bank of America Merrill Lynch and Citigroup Inc.
26 Apr 2019

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.7 billion and year to date flows stand at $16.9 billion.  New issuance for the week was $1.2 billion and year to date HY is at $72.2 billion, which is -2% over the same period last year.


(Bloomberg)  High Yield Market Highlights

  • Gains in U.S. junk bonds have started to sputter, with the Bloomberg Barclays high-yield index poised for its weakest two-week stretch since the start of March. The oil rally, a big driver in recent days, lost its momentum and cautious investors pulled cash out of high-yield funds.
  • The reported an outflow was the first in seven weeks
  • Returns turned slightly negative on Thursday with the exception of CCCs, which have gained each day this week
  • Returns in the energy sector also turned negative, and could be poised for the same on Friday as WTI prices were down this morning by the most since March 1
  • While there was caution, investors made a beeline to new issues
  • The market remains ripe for borrowers. While investors withdrew cash from funds this week, retail funds have seen net inflows of ~$17 billion YTD amid a supply shortage
  • The month is on track to be the slowest April since 2017
  • Junk bond YTD returns dropped to 8.62%, still the best since 2009
  • CCC returns rose to 9.016%, the best asset class in fixed income
  • BBs stood at 8.28% and single-Bs at 8.64%
  • Energy returns dropped to 10.29% while ex-energy rose at 8.53%
  • Loans lagged junk bonds with 5.53% YTD


(PR Newswire)  Steel Dynamics Reports First Quarter 2019 Results 

  • Steel Dynamics, Inc. announced first quarter 2019 financial results.  The company reported first quarter 2019 net sales of $2.8 billionand net income of $204 million.
  • Comparatively, prior year first quarter net income was $228 million, with net sales of $2.6 billion.  Sequential fourth quarter 2018 net income was $270 million, which included additional company-wide performance-based compensation and lower earnings associated with planned maintenance outages at the company’s liquid pig iron production facility and its two flat roll steel mills.  Excluding these items, the company’s fourth quarter adjusted net income was $302 million.
  • “The team delivered a strong first quarter performance in a somewhat challenging flat roll steel pricing environment,” said Mark D. Millett, President and Chief Executive Officer.  “A downward trend in flat roll steel prices began in the second half of 2018, and continued through mid-first quarter 2019, reaching an inflection point in February 2019.  The teams were able to increase shipments and offset some of the margin compression, resulting in first quarter 2019 consolidated operating income of $292 millionand adjusted EBITDA of $382 million.  The continued stabilization and improvement in flat roll steel prices are having a positive impact, resulting in increased flat roll order activity and solid order backlogs.  We are seeing continued strength in the automotive, energy and industrial sectors, and as evidenced by strong steel fabrication backlogs, strength in non-residential construction.”
  • The company generated cash flow from operations of $182 millionduring the first quarter 2019 and maintained liquidity of $2.2 billion at March 31, 2019.  On March 1, 2019, the company used available cash of $93 million to fund the purchase of a 75 percent controlling interest of United Steel Supply, a leading distributor of painted Galvalume® flat roll steel used for roofing and siding applications.
  • As evidence of the confidence in the company’s sustainable long-term cash flow generation capability, the board of directors approved a 28 percent increase in the company’s first quarter 2019 cash dividend, reflecting the strength of the company’s capital foundation and liquidity profile.  The company also repurchased $84 millionof its common stock during the first quarter of 2019.


(Investor’s Business Daily)  New-Home Sales Surge To 16-Month High

  • New home sales unexpectedly rose 4.5% in March to a 692,000 annual rate, the best since November 2017, the Commerce Department reported Tuesday. Home sales have picked up in recent months as the Fed suspended rate hikes and mortgage rates fell, hitting a one-year low last month. That’s given new life to homebuilder stocks. Pulte Group (PHM) reported better-than-expected first-quarter earnings early Tuesday.
  • Earlier on Tuesday, Pulte Group reported flat first-quarter EPS of 59 cents a share, 12 cents ahead of estimates. Revenue rose 1.4% to $2.0 billion. Still, new orders were valued at $2.7 billion, down from $2.9 billion a year ago.
  • Pulte CEO Ryan Marshall said, “Helped by the recent decline in mortgage rates, homebuyers have been steadily returning to the market after a period of slowing demand that began in the second half of 2018.”
  • Lower rates should allow housing to help cushion the landing for an economy that has slowed somewhat as tax-cut stimulus fades. Still, most economists expect the pace of improvement to be modest.
18 Apr 2019

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • S. junk bond returns turned negative yesterday across ratings for the first time in almost four weeks. Yields were off their near 12-month low as equities faltered and oil lost momentum.
  • Issuers were undeterred, selling 5 deals for $2.6b, the busiest day in more than 4 weeks, with triple Cs accounting for almost 70% of the volume
  • Junk bond returns remain best since 2009, with 8.47% year- to-date
  • Retail funds estimate inflow of $926m at Tuesday’s close, JPMorgan wrote, citing Lipper
  • Funds have reported inflows for the last five consecutive weeks
  • 1Q saw an inflow of $13b, most since 3Q12’s $13.8b
  • Energy returns stood at 9.93% YTD
  • Ex-energy dropped to 8.2% after losing 0.06%
  • Single-Bs and CCC returns were at 8.55% and 8.59% YTD, respectively
  • BBs were at 8.2%
  • Loans lagged bonds at 5.265%
  • Steady growth, low default rate, and strong technicals provide friendly turf for junk bonds
  • Moody’s global high-yield default rate dropped to 1.9% for the 12-month period ended March 2019, lowest since October 2011
  • S. high-yield default rate is expected to close 2019 at 2.2%


(PR Newswire)  U.S. Concrete Names Ronnie Pruitt President and COO

  • S. Concrete, Inc., a leading supplier of ready-mixed concrete and aggregates in active construction markets across the country, announced today that Chief Operating Officer (“COO”), Ronnie Pruitt, 48, has been named President and COO, effective April 15, 2019. Mr. Pruitt will continue to report to Chairman and CEO, William J. Sandbrook, and in this expanded role will take over many corporate functions that support the Company’s operational business units.
  • Pruitt, who has been with U.S. Concrete since 2015, has over 25 years of industry experience.  Prior to joining U.S. Concrete, Mr. Pruitt served as Vice President of Martin Marietta Materials, Inc., and as Vice President of Cement Production and Vice President of Sales and Marketing of Texas Industries, Inc.
  • “Ronnie has been instrumental in the strategic growth of our Company including very successfully integrating Polaris Materials, a major aggregates acquisition. His leadership and record of success with our ready-mixed concrete and aggregates operations has earned him this expanded role,” said U.S. Concrete Chairman and CEO William J. Sandbrook. “Ronnie is a champion for the health and safety of our employees, is dedicated to our environmental and sustainability initiatives and is laser focused on creating enhanced shareholder value through operational excellence. I am proud of Ronnie’s success and look forward to his enhanced contributions in his expanded role.”


(CNET)  T-Mobile’s John Legere denies Justice Department pushback on Sprint merger

  • The Justice Department’s antitrust division is determining whether a combination of the US’ third- and fourth-largest wireless service providers would pose a threat to competition, according to a Tuesday report by The Wall Street Journal. Earlier this month, staffers reportedly shared concerns about the deal and the carriers’ arguments that merging would lead to key efficiencies for the company.
  • Legere tweeted that the premise of the Journal’s story “is simply untrue,” adding the company has no further comment.
  • Last year, the two carriers announced their $26 billion deal to merge. It may still take several weeks for a final decision to be made, as several state attorneys general are reviewing the deal and the Federal Communications Commission is seeking more data from the companies about the proposed merger, according to the Journal.


(Company Filing)  Western Digital Appoints Robert Eulau As Chief Financial Officer

  • Western Digital Corp. announced the appointment of Robert Eulau to lead the company’s finance organization as executive vice president and chief financial officer (CFO), reporting to Steve Milligan, Western Digital’s chief executive officer (CEO). Eulau will join Western Digital on April 22, 2019 to begin his transition into the new role and will formally take over the CFO role from Mark Long on May 9, 2019. Eulau, who joins Western Digital with more than 30 years’ experience in financial and operational leadership roles in the technology industry, succeeds Long, who, as previously announced, will be leaving the company in June 2019.
  • “Western Digital occupies an increasingly strategic position in today’s data-driven world. Bob Eulau’s background in optimizing financial and operational performance, paired with his strong leadership skills, will help position us to make the most of exciting short- and long-term growth opportunities,” said Milligan. “I’m thrilled to be adding an executive of Bob’s caliber to our leadership team and I look forward to working with him.”
  • “I’m honored to join Western Digital at such an important time in the company’s history,” said Eulau. “The team has built a strong platform for growth and value creation, and I look forward to helping maximize the many opportunities ahead for the company.”
  • Eulau was most recently CEO at Sanmina Corporation where he previously served for eight years as CFO. Previously, Eulau held chief financial officer positions at Alien Technology Corporation and Rambus Incorporated, and held a number of financial leadership roles at Hewlett-Packard Company. Eulau earned a Master’s in Business Administration (Finance/Accounting) from The University of Chicago and a Bachelor’s in Mathematics from Pomona College. He will be based at the company’s San Jose, CA headquarters location.
12 Apr 2019

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

The investment grade credit market continues to benefit from the euphoria of risk-on sentiment that is flooding the capital markets.  The OAS on the index closed Thursday at its tightest level of the year.  Segmenting the index out by quality, both the A-rated portion of the index and the BBB-rated portion are now trading at year-to-date tights.  The market also feels quite strong as we go to print on Friday morning and it looks likely that the corporate bond index will close the week even tighter still.  On the Treasury front, rates are higher across the curve, with the 5yr Treasury up 6 basis points over the past week and the 10yr Treasury up 5 basis points.

Corporate issuance was somewhat muted as borrowers brought just $10.15bln of new debt during the week.  Corporate issuance is likely to remain light in the weeks to come as many companies are now in earnings blackout periods.  The big story of the week on the new-issuance front was non-corporate borrower Saudi Arabian Oil Co, which priced $12bln of new debt across 5 tranches.  The Saudi bonds were soaked up by yield chasers across the globe on no other analysis other than it was “cheap for the rating.”  According to Bloomberg, the order book for the new issue was allegedly in excess of $100bln which is quite strong relative to the $12bln size of the deal. However, all 5 tranches of debt immediately traded wider on the break and all remain wider on the bid side as we go to print.  The 10yr tranche in particular is sucking wind, and is currently bid at +120 in the street versus its new issue pricing level of +105.  This leads us to believe that demand for this deal may have been overstated, possibly by an order of magnitude.  $26.2bln of new corporate debt has been priced in the month of April and the year-to-date tally of new issuance is up to $346bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of April 4-April 10 were +$8.7bln. This brings YTD IG fund flows to +$81bln.  2019 flows to this juncture are up 2.6% relative to 2018.


09 Apr 2019

2019 Q1 Investment Grade Quarterly

The performance of investment grade credit during the opening quarter of the year was in stark contrast to the final quarter of 2018, as risk assets of all stripes performed well during the first quarter. The spread on the Bloomberg Barclays US Corporate Index finished the quarter 34 basis points tighter, after opening the year at a spread of 153 and closing the quarter at a spread of 119. The one-way spread performance of investment grade credit was so pronounced that at one point in the quarter there was a 22 trading day streak where the market failed to close wider from the previous day.i This was a remarkable feat considering that there were just 61 trading days during the quarter. The 10yr Treasury opened the year at 2.68% and closed as high as 2.79% on January 18th, but it finished the quarter substantially lower, at 2.41%. Tighter spreads and lower rates yielded strong performance for investment grade credit and the Bloomberg Barclays US Corporate Index posted a total return of +5.14%. This compares to CAM’s gross total return of +4.95% for the Investment Grade Strategy.

What a Difference Three Months Makes

When the Federal Reserve issued its December FOMC statement the consensus takeaway by the investor community was an expectation of two rate hikes in 2019 with one additional rate hike thereafter, in 2020 or 2021. In any case, the prevailing thought was that we were nearing the end of this tightening cycle with a conclusion to occur over the next two or three years. The Fed then took the market by surprise in late January, with language that was more conservative than expected as FOMC commentary signaled that they were less committed to raising the Federal Funds Rate in 2019. It was at this point that the market perception shifted – with most investors expecting just one rate hike in the latter half of 2019. The March FOMC statement was yet another eyeopener for Mr. Market, with language even more dovish than the decidedly dovish expectations. The consensus view is now murkier than ever. Some market prognosticators are pricing in rate cuts as soon as 2019; but the more conservative view is that barring a material pickup in global growth or domestic inflation we may not see another increase in the federal funds rate for 6-12 months, if at all in this cycle. It is entirely possible that the current tightening cycle has reached its conclusion and that lower rates could be here to stay.

In the days following the March 20th FOMC release, the 10yr Treasury rallied sharply and there were two days during the week of March 25th where the 90-day Treasury bill closed with a slightly higher yield than the 10yr Treasury. This was the first time that this portion of the yield curve has been inverted since August of 2007. Note that this inversion was very brief in nature and as we go to print at the end of the day on April 1st, the 3m/10yr spread is no longer inverted and is now positive sloping at +17 basis points. That is not to say that this portion of the curve will not invert again, because Treasury rates and curves are dynamic in nature and ever changing.

What Has Happened to Corporate Credit Curves?

This is a common question in the conversations we have had with our investors in recent weeks. Corporate markets are entirely different from Treasury markets and behave much more rationally. The defining characteristic of corporate credit curves is that they nearly always have a positive slope. History shows that corporate credit curves typically steepen as Treasury curves get flatter. There are fleeting moments from time to time where corporate credit curves become slightly inverted but these instances are brief in nature and are quickly erased as market participants are quick to take advantage of these opportunities. For example, there may be a motivated seller of Apple 2026 bonds at a level that offers slightly more yield than Apple 2027 bonds. This has nothing to do with dislocation in the Apple credit curve and everything to do with the fact that there is an extremely motivated seller of the bond that is slightly shorter in maturity. Once that seller moves their position, the curve will return to normalcy and you could once again expect to obtain more yield for the purchase of the 2027 bond than you would for the 2026 bond. The following graphic illustrates current 5/10yr corporate credit curves for two widely traded investment grade companies, one A-rated and one BBB-rated. As you can see, corporate credit curves are much steeper than the spread between the 5 and 10yr Treasury.

The Bottom Line

The takeaway from this exercise is that investors will always be afforded extra compensation by extending out the corporate credit curve. At Cincinnati Asset Management, one of the key tenets of our Investment Grade Strategy is that we believe that it is nearly impossible to accurately predict the direction of interest rates over long time horizons. However, throughout economic cycles, we have observed that the 5/10 portion of the curve is usually the sweet spot for investors. Consequently, the vast majority of our client portfolios are positioned from 5 to 10 years to maturity. We will occasionally hold some positions that are shorter than 5 years but we almost never purchase securities longer than 10 years. Further, while an investor can earn more compensation for credit risk by extending out to 30yrs, more often than not this strategy entails excessive duration risk relative to the compensation afforded at the 10yr portion of the curve. Our strategy allows us to mitigate interest rate risk through our intermediate positioning and allows us to focus on managing credit risk through close study and fundamental analysis of the individual companies that populate our portfolios.

Where in the World is the Yield?

The value of negative yielding global debt hit a multiyear low in October of 2018 but it has exploded since, topping $10 trillion as the sun set on the first quarter, the highest level since September 2017.ii

The growth in negative yielding debt has, in some cases prompted foreign investors to pile into the U.S. corporate debt market. A measure of overseas buying in 2019 has more than doubled from a year earlier according to Bank of America Corp.iii Japanese institutions are among the biggest of the foreign investors and the Japanese fiscal year started on April 1, which could lead to even more buying interest in U.S. corporates according to Bank of America. According to data compiled by the Federal Reserve as of the end of 2018, Non-U.S. investors held 28% of outstanding U.S. IG corporate bonds.iv What does this all mean for the U.S. corporate bond market? First, it is safe to assume that foreign demand certainly played a role in the spread tightening that the investment grade credit markets have experienced year to date. Second, although U.S. rates may seem low, when viewed through the lens of global markets, they are actually quite attractive on a relative basis. As long as these relationships exist then there will be continued foreign interest in the U.S. credit markets.

Although our Investment Grade Strategy trailed the index in the first quarter, we are pleased with the conservative positioning of our portfolio. The modest underperformance can largely be explained by our significant underweight in lower quality BBB-rated credit relative to the index. We do not have a crystal ball, but are reasonably confident that we are in the later stages of the credit cycle so we continue to place vigilance at the forefront when it comes to risk management. Please know that we take the responsibility of managing your money very seriously and we thank you for your continued interest and support.

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. See Accompanying Endnotes

i Bloomberg Barclays US Corporate Total Return Value rounded to the nearest hundredth from the close on January 3rd, to the close on February 7th

ii Bloomberg, March 25, 2019, “The $10 Trillion Pool of Negative Debt is Late-Cycle Reckoning”

iii Bloomberg, March 22, 2019, “U.S. Corporate Debt Is on Fire This Year Thanks to Japan”

iv CreditSights, March 8, 2019, “US IG Chart of the Day: Who’s Got the Bonds?”