Category: High Yield Weekly

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.3 billion and year to date flows stand at -$25.6 billion.  New issuance for the week was $1.0 billion and year to date issuance is at $33.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the sixth straight weekly loss as yields jump to a fresh 16-month high of 5.85% amid global market turmoil after Russia’s invasion of Ukraine. This would be the longest losing streak in more than six years.
• The primary market ground to a halt after pricing a little more than $9b this month, the slowest February since 2016. It’s also the slowest start to a year for issuance since 2016, with year- to-date volume at $33b.
• Rising yields and steady losses in junk bonds across ratings came amid broader market turbulence this year caused by inflation concerns, a hawkish Federal Reserve and geopolitical tensions.
• Given the lack of clarity on macro risks, “risk assets will be under pressure in the near term,” Barlcays’ strategist Brad Rogoff wrote on Friday.
• The BB index, the most rate-sensitive part of the high-yield market, is now set to post its eighth straight weekly loss, the longest period of losses since July 2013, after yields veered toward a 19-month high of 4.83%.
• CCCs, the riskiest part of the junk-bond market, is also headed to end the week with losses. This would be the sixth consecutive week of losses as yields rose to a new 15-month high of 8.53%.

 (Bloomberg)  What the Russian Invasion Means for Credit

• Russia’s invasion of Ukraine will translate to more trouble for corporate debt, money managers say. Some also wonder if the latest market weakness is a buying opportunity.
• For now, few market participants are taking that risk. Companies postponed bond sales in the U.S. and Europe on Feb. 24 and credit risk gauges surged after Russia invaded Ukraine.
• The military action heightened volatility in global bond markets already roiled by inflation and tightening monetary policy. Now oil prices are rising to their highest levels since 2014, and wheat prices in Paris hit a record. The result of inflation plus slower growth may be stagflation that can be terrible for corporate bondholders.
• “The escalated uncertainty in Ukraine, and the spike in commodity prices, moderates the outlook for global growth and therefore increases the risk for corporate credit,” said Matt Toms, chief investment officer of fixed-income at Voya Investment Management.
• Borrowers who could sell debt easily on any day for much of the last two years are now having to look for windows of relative calm. Price swings in secondary markets are widening.
• New sales of U.S. investment-grade and junk bonds will likely shut down for the remainder of the week, according to people familiar with the matter. BellRing Brands on Feb. 24 withdrew a junk-bond deal that it had started marketing earlier in the week.
• U.S. leveraged loan prices fell 1/2 to a full point in muted secondary trading on Feb. 24, according to people familiar. Meanwhile, a gauge of U.S. credit risk spiked, with the cost to protect a basket of investment-grade dollar bonds against default rising to the highest level since July 2020.
• But even if the global growth picture is concerning, few U.S. companies will be severely affected by the invasion at this stage, investors said.
• “The entire global economy is going to be impacted by Russia and Ukraine, but there’s not really going to be a lot of direct impact in the U.S., in terms of issuers whose results are going to be directly impacted by what’s going on there,” said Jeremy Burton, a portfolio manager at Pinebridge Investments.
• Prices on investment-grade bonds now may end up being a great deal in retrospect, said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors.
• “Keep your eyes on the long-term and don’t get sucked into the abyss of negativity,” Elfner said. “Short-term blips in volatility and weakness in financial markets tend to be long-term buying opportunities.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$3.6 billion and year to date flows stand at -$10.6 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $25.4 billion.

 (Bloomberg)  High Yield Market Highlights

• The U.S. junk bond primary market was powered by leveraged buyouts this week as cyber security firm McAfee Corp. and Scientific Games Holdings, a gaming and lottery operator, together sold almost $3b, accounting for one-half of this week’s issuance volume as the high yield market recovered from its worst January on record.
• Junk bond borrowers of all stripes – funding strategic acquisitions, LBOs and plain-old refinancing outstanding debt – seemed to be in a hurry to rush to the market to get ahead of the rate-hike cycle, which is widely expected to begin as early as March, and avoid the uncertainty volatility that may follow.
• The U.S. leveraged finance market was also undergoing a shift triggered by the Federal Reserve’s signal that rate hikes may begin in the next meeting and the overall hawkish tone suggesting an end to the easy money policy.
• The shift became evident in McAfee Corp. and Scientific Games Holdings moving a portion of bonds to term loan as the latter, with a floating rate coupon and spot higher in the capital structure, were more attractive to investors in a rising rate environment.
• The junk bond market was broadly resilient even as cautious investors pulled cash out of high yield retail funds.
• Investors pulled almost $4b from U.S. high yield funds, the biggest weekly outflow since March of 2021 and the fourth consecutive week of outflows, the longest streak since June of 2021.
• While weak earnings reports and increased central bank hawkishness drove a sharp sell-off in risk assets, “it is still too early to buy the dip,” Barclays strategist Brad Rogoff wrote on Friday, adding that monetary policy uncertainty is likely to remain elevated.
• The broader junk bond returns came under pressure on Thursday posting losses of 0.4% as yields jumped 15bps to 4.21%.
• Junk bonds may pause as U.S. equity futures reversed gains as concerns over inflation and monetary tightening outweighed earnings optimism driven by Amazon.com, Inc.
• Oil, meanwhile, has rocketed to a fresh seven-year high near $92 a barrel, and almost every indicator is pointing to the rally extending.

(Bloomberg)  U.S. Job Growth Blows Past Estimates, Defying Gloom Over Omicron

• U.S. employers extended a hiring spree last month despite a record spike in Covid-19 infections and related business closures, with surging wages adding further pressure on the Federal Reserve to raise interest rates.
• Nonfarm payrolls increased 467,000 in January in a broad-based advance that followed substantial upward revisions to the prior two months, a Labor Department report showed Friday. The unemployment rate ticked up to 4%, and average hourly earnings jumped.
• The median estimate in a Bloomberg survey of economists called for a 125,000 advance in payrolls, though forecasts ranged widely. A variety of factors including omicron, seasonal adjustment and the way workers who are home sick are factored in make interpreting the January data challenging.
• The surprise display of strength suggests the labor market continues to improve, despite the temporary disruption from record-high levels of coronavirus infections and the resulting absenteeism from work. The data further reinforce Fed Chair Jerome Powell’s description last week of the labor market as “strong” and validate the central bank’s intention to raise interest rates in March to combat the highest inflation in nearly 40 years.
• The dollar jumped along with Treasury yields following the report. U.S. stock-index futures dipped slightly. Investors began to price in the slight possibility of a sixth quarter-point Fed rate hike by the end of this year, while continuing to see a March increase as a lock and nudging up the chance of a 50-basis-point jump.
• Meanwhile, the Labor Department’s report showed average hourly earnings rose 0.7% in January and 5.7% from a year ago, further fanning concerns about the persistence of inflation. The average workweek dropped.
• The faster-than-expected advance in pay could fuel market concerns about the Fed taking an even more aggressive stance on inflation this year.
• Despite the better-than-expected report, the impact of omicron on the labor market in January was substantial. There were 3.6 million employed Americans not at work due to illness, more than double that in December. Meanwhile, 6 million people were unable to work in the month because their employer closed or lost business due to the pandemic, roughly twice that in December.
• The potential for a weak — or even negative — payrolls print, largely because of virus-related disruptions, was well telegraphed in the days ahead of the report, including by White House and Fed officials.
• The job gains were broad based, led by a 151,000 advance in leisure and hospitality. Transportation and warehousing, retail trade and professional and business services also posted solid increases.
• The solid employment growth in several categories may reflect businesses choosing to retain more holiday workers than normal in the face of a tight labor market.

 Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.6 billion and year to date flows stand at -$1.0 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $10.5 billion.

 (Bloomberg)  High Yield Market Highlights

• The U.S. junk-bond market rebounded from last week’s losses and is on track to end the week with gains, powered by a jump in oil prices and shrugging off outflows from retail funds. The rally boosted the primary market, which has seen $6 billion price.
• The risk-on mood was evident as two first-time issuers came to market. Borrowers sold debt to fund a dividend and buy back shares even as investors pulled cash from U.S. high-yield funds.
• The broader junk-bond index has made modest gains of 0.28% week-to-date after posting a small loss of 0.05% on Thursday.
• Junk-bond index yields rose to 4.51% yesterday, up 6bps, and is down 9bps week-to-date.
• The CCC index has gained 0.31% week-to-date after posting a modest loss of 0.02% yesterday.
• CCC yields rose 4bps to close at 6.95%, down 11bps week-to-date.
• The markets may waver as U.S. equity futures fluctuated ahead of the earnings season as investors turn away from inflation concerns and Federal Reserve policy. And oil, meanwhile, headed for a fourth straight weekly gain, the longest streak since October.

(Bloomberg)  U.S. Inflation Hits 39-Year High of 7%, Sets Stage for Fed Hike

• U.S. consumer prices soared last year by the most in nearly four decades, sapping the purchasing power of American families and setting the stage for the Federal Reserve to begin hiking interest rates as soon as March.
• The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to Labor Department data released Wednesday. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.
• Excluding the volatile food and energy components, so-called core prices accelerated from a month earlier, rising by a larger-than-forecast 0.6%. The measure jumped 5.5% from a year earlier, the biggest advance since 1991.
• The increase in the CPI was led by higher prices for shelter and used vehicles. Food costs also contributed. Energy prices, which were a key driver of inflation through most of 2021, fell last month.
• The data bolster expectations that the Fed will begin raising interest rates in March, a sharp policy adjustment from the timeline projected just a few months ago. High inflation has proven more stubborn and widespread than the central bank predicted amid unprecedented demand for goods along with capacity constraints related to the supply of both labor and materials.
• Meanwhile, the unemployment rate has now fallen below 4%. Against this evolving backdrop, some Fed policy makers have said that it could be appropriate to begin shrinking the central bank’s balance sheet soon after raising rates.
• “In terms of where the Fed is on their dual mandate — inflation and the labor market — they’re basically there,” Michael Gapen, chief U.S. economist at Barclays Plc, said on Bloomberg Television. “I don’t really think anything stops them going in March except one of these kind of outlier events. I think they’re ready.”

(Bloomberg)  U.S. Retail Sales Slide Most in 10 Months on Inflation, Omicron

• U.S. retail sales slumped in December by the most in 10 months, suggesting the fastest inflation in decades is taking a greater toll on consumers just as the nation confronts more coronavirus infections.
• The value of overall purchases decreased 1.9%, after a revised 0.2% gain a month earlier, Commerce Department figures showed Friday.
• The median estimate in a Bloomberg survey called for a 0.1% drop in overall retail sales from the prior month.
• The year-end slide in retail purchases sets up for a tepid handoff to the first quarter. Combined with the impact from the omicron variant, which is denting outlays for services such as travel and dining out, the figures help explain why economists project household spending to soften.
• Furthermore, falling price-adjusted wages, dwindling savings and the end of the government’s pandemic-related financial programs suggest a more moderate pace of spending.
• December, at the tail end of the holiday-shopping season, is traditionally a solid month for retail sales. However, concerns about shipping delays prompted many consumers to shop earlier than usual to ensure gifts arrived on time. Because the figures are adjusted for seasonal variations, the earlier shopping may have contributed to the weaker-than-expected figures.

(Bloomberg)  Fed’s Brainard Says Curbing Inflation Is ‘Most Important Task’

• Federal Reserve Governor Lael Brainard said tackling inflation and getting it back down to 2% while sustaining an inclusive recovery is the U.S. central bank’s most pressing task.
• “Inflation is too high, and working people around the country are concerned about how far their paychecks will go,” Brainard said in remarks prepared for a confirmation hearing before the Senate Banking Committee. “Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone. This is our most important task.”
• Brainard was nominated by President Joe Biden to serve as Fed vice chair.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at -$6.2 billion.  New issuance for the week was $5.2 billion and year to date issuance is at $459.9 billion.

 (Bloomberg)  High Yield Market Highlights

•  The recent selloff in the U.S. junk-bond market looks like the distant past as the index is now poised to post gains for the second consecutive week, and potentially the biggest gains in more than three months.
• The riskiest segment of the junk bond market, CCCs, are also on track to close the week with the highest returns since the end of August and are likely to be the best-performing asset class in the U.S. fixed-income market.
• Returns on the broader junk-bond index week-to-date stood at 0.67% and CCC gains at 0.8%.
• As investors rush back to the asset, U.S. high-yield funds saw an inflow for the week after outflows the two previous weeks.
• “The late November weakness in risk assets has come and gone, with sentiment reversing completely in December,” Barclays strategist Brad Rogoff wrote on Friday.
• In corporate cash markets, the high-yield to investment-grade spread has shrunk after the recent decompression, Barclays wrote in the note.
• The primary market was steady pricing deals to take the week’s tally to more than $5b.
• The broader junk bond yields rose 6bps to close at 4.46% but will end the week lower for the second time this month.
• The Single B index may see the biggest weekly gains in 12 months, with week-to-date returns of 0.72%.
• CCC yields closed at 7.06% and may end the week lower to see the biggest weekly drop in more than three months.

  (Wall Street Journal)  U.S. Jobless Claims Fall to Lowest Level in 52 Years

• Worker filings for unemployment benefits hit the lowest level in more than half a century last week as a tight labor market keeps layoffs low.
• Initial jobless claims, a proxy for layoffs, fell to 184,000 in the week ended Dec. 4, the lowest level since September 1969, the Labor Department said Thursday. That was close to a recent record total of 194,000 recorded in late November.
• The prior week’s level was revised up to 227,000. The four-week moving average, which smooths out weekly volatility, fell to 218,750.
• Unemployment claims have been steadily falling all year as the labor market has tightened. They have now fallen below where they were before the pandemic caused layoffs to surge in March 2020. Claims averaged 218,000 in 2019, the year before the pandemic hit the U.S.
• Economists say seasonal volatility around the holiday season may have contributed to last week’s low number.
• The decline in new claims is an indication that employers are reluctant to lay off workers as jobs are plentiful, consumer demand is high and the pool of prospective workers remains lower than before the pandemic.
• “We expect claims will start to more consistently hover around pre-Covid averages of 220,000 or perhaps slightly lower given current tight labor market conditions,” said Nancy Vanden Houten, lead economist at Oxford Economics.
• More unemployed workers should eventually get new jobs as they exhaust their benefits, she added.
• The unemployment rate fell to 4.2% in November from 4.6% in October, the Labor Department reported Friday. The share of people ages 25 to 54 who are either working or looking for work rose to 82.1% from 81.9%, a sign that prime-age Americans are starting to get back into the labor force. But the labor-force participation rate for that age group remains below where it was in February 2020, when it stood at 83.1%.
• “The overriding dynamic in the job market of late has been this shortage of workers,” said Mark Hamrick, senior economic analyst at Bankrate. “The issue of fresh job loss has not been key for many months now.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.1 billion and year to date flows stand at -$2.2 billion.  New issuance for the week was $12.7 billion and year to date issuance is at $417.2 billion.

 (Bloomberg)  High Yield Market Highlights

• The riskiest part of the junk bond market is poised to post gains for the second consecutive week.  Should the current trend hold, CCCs will close the week as the best performing asset in high yield amid rate volatility and inflation anxiety.
• The broader junk bond index may also end the week with modest gains for the second straight week, with 0.04% largely propelled by CCCs.
• While risk assets managed to tune out macro concerns, “continued rate volatility could be a potential source of risk for valuations and at least create opportunities within credit”, Barclays strategist Brad Rogoff wrote on Friday.
• U.S. junk bond yields have come under pressure and have jumped 34bps since August to close at 4.18%; CCC yields rose 38bps to close at 6.53% as inflation fears took on momentum with the 5-year U.S. Treasury yields rising about 46bps in that period to close at a 20-month high of 1.243%.
• Investors assessed rising yields and falling prices, re-entering the market to pour cash into retail funds.
• U.S. high yield funds report an inflow of $2.1b this week, the biggest since April.
• The primary market remained healthy with $12.7b of issuance.

(Bloomberg)  Fed’s Quarles Urges November Taper and Warns of Inflation Risks

•  Federal Reserve Governor Randal Quarles said he favors an initial move to slow monetary stimulus next month and is concerned by a broadening of inflationary pressures that could require a policy response.
• “I would support a decision at our November meeting to start reducing these purchases,” he said in remarks prepared for a speech Wednesday to a Milken Institute conference in Los Angeles, referring to the central bank’s bond-buying program, which is currently running at $120 billion a month.
• Fed officials are getting ready to begin winding down the bond-buying program they put in place last year in the early days of the pandemic. They broadly agreed to start the process in either mid-November or mid-December, according to minutes of their last meeting on Sept. 21-22.
• Quarles said he agreed that current high inflation is “transitory,” and that the central bank is not “behind the curve” with its monetary policy. While price moves have been prompted by supply disruptions during the Covid-19 pandemic, the surges have lasted longer than expected and there has been a broadening of the number of items that have seen price surges, he said.
• “There is evidence in the past couple of months that a broader range of prices are beginning to increase at moderate rates, and I am closely watching those developments,” he said.
• Quarles’ prepared remarks didn’t give an explicit forecast for the timing of interest-rate liftoff. Projections published at the conclusion of the Fed’s September meeting showed officials were evenly split on whether increases in its benchmark interest rate, which is currently near zero, would be necessary next year.
• During a question and answer session, he said that “if we are still seeing 4% inflation or in that area next spring, then I think we might have to reassess the speed with which we would be thinking about raising interest rates.”
• Quarles’ position as Fed vice chairman of supervision expired earlier this month and the Fed Board in Washington decided not to have any single governor take that position while awaiting a fresh nomination by President Joe Biden.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.2 billion and year to date flows stand at -$3.0 billion.  New issuance for the week was $5.2 billion and year to date issuance is at $404.4 billion.

(Bloomberg)  High Yield Market Highlights

• Junk bonds bounced back from a recent dip, taking a cue from equities, to post the biggest one-day gains in seven and yields saw the biggest decline in almost five weeks, ending the day at 4.19%.
• The junk bond index is poised to snap its three-week losing streak and post the biggest gains since mid-September, with week-to-date returns of 0.11%
• Gains were across the board as oil prices closed at a seven-year high of $81.31 on Thursday.
• Primary market resilience was evident as issuance continued at a steady pace.
• US. junk-bond investors, while continuing their search for yield, were demanding appropriate risk premium.
• Amid broader resilience, investors are growing cautious amid concerns about increasing volatility. That was evident in the lack of interest as debt-laden alarm company Monitronics International struggles to find enough buyers for its $1.1b 7-year notes, the inaugural bond offering since emerging from bankruptcy two years ago.
• These were slated to price earlier in the week.
• Investors also pulled cash from retail funds, with an outflow of $1.2b from U.S. high yield funds, the biggest since mid-June.
• The broader junk bond index spreads dropped 6bps to +295bps and posted gains of 0.29% on Thursday, the biggest one-day returns since March.
• Single B yields also dropped 12bps to close at 4.60%, the biggest decline in six weeks, and the index posted gains of 0.29%, also the biggest since March.

(CNBC)  Fed says it could begin ‘gradual tapering process’ by mid-November

• Federal Reserve officials could begin reducing the extraordinary help they’ve been providing to the economy by as soon as mid-November, according to minutes from the central bank’s September meeting released Wednesday.
• The meeting summary indicated members feel the Fed has come close to reaching its economic goals and soon could begin normalizing policy by reducing the pace of its monthly asset purchases.
• In a process known as tapering, the Fed would reduce the $120 billion a month in bond buys slowly. The minutes indicated the central bank probably would start by cutting $10 billion a month in Treasurys and $5 billion a month in mortgage-backed securities. The Fed is currently buying at least $80 billion in Treasurys and $40 billion in MBS.
• The target date to end the purchases should there be no disruptions would be mid-2022.
• The minutes noted “participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate.”
• “Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December,” the summary said.
• St. Louis Fed President James Bullard told CNBC on Tuesdaythat he thinks tapering should be more aggressive in case the Fed needs to rate interest rates next year to combat persistent inflation.
• At the September policymaking session, the committee voted unanimously to hold the central bank’s benchmark short-term borrowing rate at zero to 0.25%.
• The committee also released the summary of its economic expectations, including projections for GDP growth, inflation and unemployment. Members scaled back their GDP estimates for this year but upped their outlook for inflation, and indicated they expect unemployment to be lower than earlier estimates.
• In the “dot plot” of individual members’ expectations for interest rates, the committee indicated it could begin raising interest rates as soon as 2022. Markets currently are pricing in the first rate hike for next September, according to the CME FedWatch tool. Following the release of the minutes, traders increased the likelihood of a September hike to 65% from 62%.
• Officials, though, stressed that a tapering decision should not be seen as implying pending interest rate hikes.
• However, some members at the meeting showed concern that current inflation pressures might last longer than they had anticipated. Traders are pricing in a 46% chance of two rate hikes in 2022.
• “Most participants saw inflation risks as weighted to the upside because of concerns that supply disruptions and labor shortages might last longer and might have larger or more persistent effects on prices and wages than they currently assumed,” the minutes stated.
• The document noted that “a few participants” said there could be some “downside risks” for inflation as long-standing factors that have kept prices in check come back into play. The majority of Fed officials have been holding to theme that the current price increases are transitory and due to supply chain bottlenecks, and other factors likely to subside.
• Inflation pressures have continued, though, with a reading Wednesday showing that consumer prices are up 5.4% over the past year, the fastest pace in decades.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$1.8 billion.  New issuance for the week was $15.1 billion and year to date issuance is at $399.1 billion. 

(Bloomberg)  High Yield Market Highlights 

• The U.S. junk-bond market posted gains on Thursday, ending a three-day run of losses, and yields fell amid an onslaught of issuance.
• “Despite a recent pull back in valuations, the high-yield market remains relatively compressed. With dispersion at low levels, investors are finding it increasingly difficult to find opportunities in the secondary market,” Barclays strategist Brad Rogoff wrote in note on Friday.
• The primary market is crowded with debut issuers, companies borrowing after emerging from bankruptcy and LBOs.
• Amid reports of inflationary pressures, with the 5-year U.S. Treasury yield climbing to a 19-month high of 1.02%, the U.S. junk-bond index came under some modest pressure as it is headed a loss for the third consecutive week.
• Yields fell 5bps to close at 4.11% on Thursday and spreads closed at +293.
• The riskiest slice of the junk bond market, CCCs, posted gains on Thursday, the biggest one-day returns in two weeks.
• CCC yields dropped 12bps to 6.18%, a two-week low and the biggest one-day decline in three weeks.
• Junk bonds may stall as U.S. equity futures drift as investors await for key employment report for clues on the Federal Reserve’s monetary policy.

(The Wall Street Journal)  Biden Backs Powell After Warren Intensifies Opposition 

• President Biden said he has confidence in Federal Reserve Chairman Jerome Powell after Sen. Elizabeth Warren (D., Mass.) on Tuesday escalated her criticismof the central bank’s leader.
• “Thus far, yes,” Mr. Biden said when asked by a reporter during a trip to Michigan if he had confidence in Mr. Powell. “But I’m just catching up to some of these assertions,” he said, referring to senior officials’ trading activitiesthat sparked Ms. Warren’s most recent volley of disapproval.
• Biden gave no indication he has made a decision over whether to offer Mr. Powell a second term when his current one expires in February. Members of Mr. Biden’s economic team have supported keeping Mr. Powell. However, Ms. Warren’s vocal opposition has complicated Mr. Biden’s political calculus, as he tries to balance moderate and progressive demandson his signature domestic policy goals.
• Several members of both parties have also voiced supportin recent weeks for Mr. Powell’s renomination, giving him high marks for his response to the pandemic. Some Democrats have been heartened by his public comments that recent inflationary pressures, because they are being driven by temporary supply-chain disruptions, don’t require an immediate policy response from the Fed.
• But a vocal minority of Democrats, led by Ms. Warren, have called for his replacement and favor someone who would be more active in pressing the central bank to regulate banks and address climate-related risks. Ms. Warren last week told Mr. Powell at a hearing that his record favoring a lighter touch on banks made him a “dangerous man” to lead the Fed and that she would not support his nomination.
• Powell is a Republican who was first nominated to the Fed’s board 10 years ago by President Obama. He was named as Fed chairman by President Trump in 2018.

(Bloomberg)  Senate Passes Short-Term Boost in Debt Limit 

• The Senate approved legislation yesterday that pulls the nation from the brink of a first-ever payment default with a short-term debt-ceiling increase, breaking a weeks-long stalemate that rattled financial markets.
• The vote was 50-48, with no Republicans in favor of the measure that simply kicks the can toward another precarious debt-limit fight in less than two months. The $480 billion increase in statutory borrowing would run out around Dec. 3.
• The debt limit increase still needs a vote in the House. House Majority Leader Steny Hoyer (D-Md.) said last night the chamber will vote on the measure on Tuesday. It’s expected to pass there, and the White House said President Joe Biden looked forward to signing into law.
• Schumer and Minority Leader Mitch McConnell (R-Ky.) struck a deal for the legislation earlier yesterday. The timeline sets up a collision course where various fiscal and policy battles will play out roughly simultaneously.
• Funding for government operations also expires on Dec. 3, risking a government shutdown unless lawmakers can complete agency budgets for this fiscal year. Also, Democrats could be trying to push through Biden’s broad economic package around that time.
• Leading up to December, Republicans will again push Democrats to raise the debt ceiling on their own through the budget reconciliation process—unless Democrats agree to drop their up-to-$3.5 trillion social tax and spending bill, a cornerstone of Biden’s legislative agenda. Democrats have agreed to push back the deadline to December, but haven’t agreed to act the next time through reconciliation.
• That gives Democrats roughly eight weeks, if they choose to pursue the complex process they sought to avoid, to push a measure through equally-divided Senate committees and allow a lengthy series of floor votes sought by Republicans.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at -$2.0 billion.  New issuance for the week was $12.7 billion and year to date issuance is at $363.5 billion.

 (Bloomberg)  High Yield Market Highlights 

• The riskiest segment of the market, CCCs, is poised to end the week as the best performing asset class, with gains of 0.33%, fueled by rising oil prices.
• The broader junk bond index is also set to post gains for fourth consecutive week, with returns of 0.16%
• Junk bond yields are still hovering well below 4%, closing at 3.76% on Thursday, just 23bps away from the all-time low of 3.53%
• It felt like the calm after a storm in the primary market with no new issues pricing or launching a roadshow on Thursday, after almost $13b priced, including the debut note sale of cryptocurrency trading platform Coinbase Global
• The junk bond calendar is steadily building up as investors make room for Medline Industries, the biggest leveraged buyout since the global financial crisis
• More borrowers are expected to tap the market as yields continue to drop and spreads tighten in the high yield market
• BB yields closed at 2.88%, just 2bps above the record low of 2.86%
• Spreads were at a 19-month low of +190bps
• Single B yields closed at 4.19%, down 1bp, and spreads tightened 4bps to +314bps
• U.S. equity futures slid and European stocks reversed gains as investors evaluated the resilience of the global economic recovery amid concerns from the Delta strain and risks from China.  Traders are waiting for August retail sales numbers, after China’s disappointing data yesterday, for cues on Federal Reserve’s taper plans. Meanwhile, oil is headed for a fourth weekly gain supported by signs of a tighter market and wider rally in energy prices.

(Bloomberg)  Gensler Turns Spotlight on Bond Prices 

• After U.S. Securities and Exchange Commission Chairman Gary Gensler signaled he may overhaul bond market regulations, industry experts zeroed in on just how opaque trading can be.
• Gensler, who testified Sept. 14 before the Senate Banking Committee, said in prepared remarks released beforehand that he wants to “bring greater efficiency and transparency” to the trading of corporate bonds, municipal bonds and mortgage-backed securities. He offered little detail on what new rules might look like.
• Market watchers have suggestions, a year after a liquidity breakdown early in the pandemic forced the Federal Reserve to backstop the bond market. A big source of angst: especially when compared with other key financial assets like stocks, it can take a lot more effort to figure out the price of a bond.
• “Pre-trade transparency is a focus,” said Kumar Venkataraman, a finance professor at Southern Methodist University and former member of the SEC’s Fixed Income Market Structure Advisory Committee. “If you’re a large, sophisticated investor, you receive quotes from many dealers and see the best price. If you’re less sophisticated, you might get a less competitive bid.”
• Currently, corporate bond trades must be reported to the Financial Industry Regulatory Authority’s Trace system no more than 15 minutes after they’re executed — a deadline that feels like an eternity in the era when stock and futures traders fret about microseconds.
• And before trades are placed, there are no publicly available price quotes. To get those can require making phone calls or sending electronic requests for quotes to a bunch of banks and brokers.
• A potential solution would require bond brokers to report their offered prices to a centralized system, which is how it’s worked in the U.S. stock market since the 1970s. That could make the business more efficient by stitching together all the different markets where bonds trade. In stocks, for instance, all orders are supposed to be automatically routed to the market with the best price.
• Sell-side banks have little incentive to provide greater transparency, since it could cut into their profits. And reporting quotes could be a costly and time-consuming process that banks currently have little interest in participating in, Venkataraman said.
• Don’t expect corporate bonds to begin trading in a centralized system like equities anytime soon, says Kevin McPartland, head of research for market structure at Coalition Greenwich.
• “The bond market is still very different from the equity market in terms of how it trades and in terms of the market participants,” he said. “Bond markets are by and large institutional markets. So we have a very informed consumer if you will.”
• The bond-market crisis of March and April 2020 is fresh in regulators’ minds. Government officials appear to view the unprecedented steps taken by the Fed in March 2020 as a mandate to address long-standing concerns that bond liquidity disappears in bad times.
• Gensler has targeted market transparency before. The opacity of the swaps market was one of the reasons why the 2008 financial crisis was so severe, since it was extremely difficult to untangle the connections between Wall Street banks who held the derivatives. Gensler, as chairman of the U.S. Commodity Futures Trading Commission, oversaw a push to get more of that business done on public markets.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$5.2 billion.  New issuance for the week was $1.4 billion and year to date issuance is at $350.4 billion.

 (Bloomberg)  High Yield Market Highlights 

• The riskiest part of the junk bond market is on track to post the first weekly gains in seven weeks and the biggest in six months.  With the primary market at a virtual standstill, CCC yields may see the biggest weekly decline in almost three months as investors steadily reposition themselves following a brief sell-off.
• The broader U.S. junk bond index is poised to end three weeks of declines, and is on track to post the biggest weekly gains in more than two months
• The index yields may see the first weekly drop in seven weeks
• The CCC index gained on Thursday for the fifth straight session, with returns of 0.1%. The week-to-date returns stood at 0.62%, the biggest since February 5th
• Yields dropped 5bps to close at 6.42% yesterday and the week-to-date drop is 23bps
• Should the trend hold, it is likely to see the biggest weekly decline since May 28
• The overall index yield was unchanged on Thursday while it fell 15bps week-to-date, to make it the biggest in eight weeks
• The primary market is expected to resume business after the Labor Day holiday as the pipeline is expected to be jammed with buyout financings
• U.S. equity futures advanced and European stocks remained steady ahead of Chair Powell’s speech at the Jackson Hole symposium later today to see if he offers any clues about the timeline for tapering bond purchases. Oil, meanwhile, is headed of the biggest weekly gain in 11 months as focus shifted to the storm that menacing the Gulf of Mexico

(Bloomberg)  S&P Sees Junk Bond Defaults Vanishing Amid Recovery, Easy Money 

• Missed debt payments by junk-rated borrowers look set to become increasingly rare amid cheap borrowing conditions and economic recovery, according to S&P Global Ratings.
• The U.S. speculative-grade corporate default rate could fall to as low as 2% by the middle of next year on a trailing 12-month basis, from 3.8% this June, according to a report by S&P. That’s the optimistic scenario, which would be the lowest level of defaults since 2015. It compares to a 2.5% baseline and 5.5% pessimistic forecast for June 2022 by S&P.
• The junk bond default rate peaked at 6.7% in December — the highest since 2010 — after lockdowns caused by the pandemic. Most borrowers are now able to cover debt payments amid favorable lending and better operating conditions, according to the S&P analysts led by Nick Kraemer, head of ratings performance analytics.
• In the second quarter, there were only 11 defaults, the fewest since the third quarter of 2018. The number of speculative-grade upgrades outpaced downgrades by about 3-to-1 in 2021, according to the report published Aug. 20.
• The delta variant could test borrowers, especially in sectors hit hardest by Covid-19, like entertainment and travel. Energy, consumer and service companies — which led the second quarter with the most defaults — are also at risk, though they are expected to broadly recover in 2022.

(The Wall Street Journal)  Western Digital in Advanced Talks to Merge With Kioxia

• Western Digital is in advanced talks to merge with Japan’s Kioxia Holdings Corp., according to people familiar with the matter.
• Long-running discussions between the companies have heated up in the past few weeks and they could reach agreement on a deal as early as mid-September, the people said. Western Digital would pay for the deal with stock and the combined company would likely be run by its Chief Executive, David Goeckeler, the people said.
• There’s no guarantee Western Digital, which had a market value of around $19 billion Wednesday afternoon, will seal an agreement, and Kioxia could still opt for an initial public offering it had been planning or another combination.
• The Wall Street Journal reported in March that Western Digital and Micron Technology were examining potential deals with Kioxia, which makes NAND flash-memory chips used in smartphones, computer servers and other devices. Micron’s interest has since cooled and Kioxia has been focused on discussions with Western Digital, which already has deep existing ties with the Japanese company.
• Western Digital, which makes hard disk drives, solid-state drives and NAND chips, has a joint venture with Kioxia for manufacturing and research and development that was set to expire starting in 2027. That agreement appears to have given Western Digital a leg up on Micron, and their existing ties could help make a WD-Kioxia combination more palatable to regulators.
• Kioxia, formerly part of Toshiba and known as Toshiba Memory, was purchased in 2018 by a group led by private-equity firm Bain Capital.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and year to date flows stand at -$5.7 billion.  New issuance for the week was $7.8 billion and year to date issuance is at $348.9 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds are headed for a third straight week of losses, the longest such streak in five months, while the cost of borrowing has jumped. Yields have risen to a more than three-month high of 4.19% amid concerns about the spread of the delta variant and its impact on economic growth, and on expectations that the Federal Reserve will soon scale back bond purchases.
• CCCs, the riskiest junk bonds, have lost 0.19%, and are on track for the seventh consecutive week of losses. Yields soared 31bps Thursday, the biggest one-day jump in more than three months, to a five-month high of 6.63%
• Borrowers have retreated amid market volatility after selling more than $33b this month, according to data compiled by Bloomberg
• Yields on the broader junk-bond index rose 8bps to 4.19% Thursday, and are poised to end higher for the six straight week, the longest stretch since July 2015, the Bloomberg-compiled data show
• Losses amount to 0.12% this week
• CCC yields have jumped 66bps this month to a five-month high of 6.63%
• Markets are fragile again Friday with a key measure of high-yield credit risk higher, and U.S. equity futures lower as faltering growth and China’s regulatory curbs compound risks before the Fed’s Jackson Hole symposium next week. Oil is headed for its longest run of daily declines since 2019 on worries about global energy demand

(Bloomberg)  Fed Minutes Show Most Officials See Taper Starting This Year

• Most Federal Reserve officials agreed last month they could start slowing the pace of bond purchases later this year, judging that enough progress had been made toward their inflation goal, while gains had been made toward their employment objective.
• “Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,” minutes of the Federal Open Market Committee’s July 27-28 gathering, released Wednesday, said. “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”
• The minutes also showed that most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.”
• S. central bankers next meet September 21-22. While the record shows that they don’t yet have agreement on the timing or pace of tapering asset purchases, most had reached consensus on keeping the composition of any reduction in Treasury and mortgage-backed securities purchases proportional.
• Policy choices going forward are also likely to be influenced by new appointees to the Fed Board as the Biden administration moves to fill as many as four positions by early 2022.
• Fed policy makers have differed publicly in the weeks since the meeting over when the central bank should start tapering, with some, like Minneapolis Fed President Neel Kashkari, wanting to a see a “few more” strong jobs reports and others, such as Boston Fed President Eric Rosengren, saying he’s open to announcing plans for a reduction at the next meeting if employment figures come in well.
• Fed officials cut their benchmark lending rate to zero in March 2020 and announced they would buy $200 billion of agency mortgage-backed securities and $500 billion of Treasuries to support market functioning. By December 2020, they realigned their guidance saying they would purchase $80 billion a month in Treasuries and $40 billion a month on mortgage securities “until substantial further progress has been made toward its maximum employment and price stability goals.
• The asset purchases have lowered longer-term interest rates and helped fuel a rise in housing prices and other financial assets, with one-month gains in home price indices breaking records while stock indexes trade around record highs.