Credit spreads traded sideways this week, remaining near year-to-date tights. The Bloomberg US Corporate Bond Index closed at 78 on Thursday December 5 after closing the week prior at the same level. The 10yr Treasury is less than 1bp higher over the course of the past week, closing at 4.169% last Friday and 4.176% through Thursday. Through Thursday, the corporate bond index year-to-date total return was +4.49%. The yield to maturity for the IG corporate bond index closed at 5.02% on Thursday.
Economics
The economic calendar had numerous releases this week but there were no meaningful surprises. The big data point of the week was the employment report on Friday morning which was solid but not spectacular. Taking it altogether, the data this week kept the Fed on course to cut rates at its meeting on December 18. Interest rate futures were pricing a 91% chance of a cut as of 10:00am on Friday morning. This was up from 66% a week ago. Looking ahead to next week, the biggest economic release is CPI on Wednesday morning.
Issuance
Issuance this week was in-line with expectations as 27 companies priced $23.2bln in the primary market relative to the consensus estimate of $25bln. This type of volume is considered very health for the month of December when the calendar can tend to be more inconsistent than other months. Syndicate desks are looking for $15bln of issuance next week which will likely be biased toward Monday-Tuesday as companies look to get ahead of Wednesday’s CPI print.
Flows
According to LSEG Lipper, for the week ended December 4, investment-grade bond funds reported a net inflow of +$2.04bln. Total year-to-date flows into investment grade funds were +$78bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads were largely unchanged during the week. The Bloomberg US Corporate Bond Index closed at 78 on Thursday November 21 after closing the week prior at the same level. The 10yr Treasury was also little changed during the period, closing at 4.44% last Friday and 4.42% this Thursday. Through Thursday, the corporate bond index year-to-date total return was +2.50%. The yield to maturity for the IG corporate bond index closed at 5.25% on Thursday.
Economics
It was an extremely light domestic economic calendar this past week with little of note. Next week brings much more data to parse and Wednesday in particular is action packed with releases for GDP, personal consumption, consumer spending, durable goods and Core PCE. This is the last time the Fed will get a look at its preferred inflation gauge prior to the FOMC rate decision on December 18. As of Thursday evening, interest rate futures were pricing in a 56% chance of a 25bp cut at the December meeting.
Issuance
It was a brisk week for issuance as borrowers brought nearly $37bln of new debt to market. Next week dealers are projecting $15-$20bln of issuance. If that tally comes to fruition, then we would expect the bulk of that supply to occur on Monday before activity starts to slow as the calendar progresses toward the Thanksgiving holiday.
Flows
According to LSEG Lipper, for the week ended November 20, investment-grade bond funds reported a net inflow of +$4.6bln. This was the largest weekly inflow since January of 2023. Total year-to-date flows into investment grade funds were +$75.3bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads inched wider this week, just off their tightest levels of the year. The Bloomberg US Corporate Bond Index closed at 77 on Thursday November 14 after closing the week prior at 74. The 10yr Treasury moved from 4.30% last Friday to 4.43% through Thursday and it is a few basis points higher this Friday morning as investors continued to digest comments from Jerome Powell late Thursday afternoon that indicated that the Fed was in no hurry to raise its policy rate, casting some doubt on a cut at the December 17-18 meeting. Through Thursday, the corporate bond index year-to-date total return was +2.41%. The yield to maturity for the IG corporate bond index closed at 5.25% on Thursday.
Economics
This was the busiest week for economic releases in some time. The bond market was closed on Monday and Tuesday was quiet but things started to pick up on Wednesday with a CPI print that came in line with economist forecasts resulting in a subdued market reaction. On Thursday, PPI came in slightly higher than expected. Friday brought a very solid retail sales print for the month of October with a sharp revision upward for the September, sparking a modest sell-off in the Treasury market. As we discussed earlier in this note, Fed Chair Powell spoke in Dallas Thursday afternoon and he gave plenty of lip service to data dependency between now and the next FOMC rate decision on December 18. This has cast some doubt on the prospect of a rate cut at the next meeting and futures were pricing in a 62.4% probability of a cut at the end of trading on Thursday. This number had been as high as 82.5% just a day earlier. Next week is extremely light on the economic front domestically but there are CPI data releases in the UK and Japan. While foreign CPI is not particularly meaningful for our markets in a vacuum, they are instructive prints for the direction that those central banks may take with regard to their policy rates, which can impact the relative value of U.S. Treasuries in a global context.
Issuance
It was the busiest week for investment grade issuance in 2 months as borrowers priced almost $46bln of new debt. The total for 2024 has now eclipsed $1.4 trillion, well ahead (+28%) of 2023’s pace. Next week, syndicate desks are looking for $20-$25bln of new supply.
Flows
According to LSEG Lipper, for the week ended November 13, investment-grade bond funds reported a net outflow of -$0.444bln. This outflow broke a streak of 15 consecutive weeks of inflows. Total year-to-date flows into investment grade funds were +$70.7bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads ripped tighter this week. The Bloomberg US Corporate Bond Index closed at 75 on Thursday November 7 after closing the week prior at 83. The index finished Thursday at its tightest level of 2024. The 10yr moved from 4.38% last Friday to 4.33% through Thursday but that does not tell the whole story as the Treasury market was quite volatile this week on the back of Tuesday’s election with most benchmark rates trading in ranges of 20+ bps throughout the week. Through Thursday, the corporate bond index year-to-date total return was +3.19%.
Economics
The election overshadowed what was a reasonably busy week for economic data but none of the prints missed expectations in either direction resulting in little market impact. The FOMC rate decision on Thursday was in line as the central bank delivered a 25bp cut to its policy rate. The Fed meets one more time this year on December 18 and interest rate futures were pricing a 71% chance of a 25bp cut at that meeting as of Thursday evening but there is plenty of data to parse over the next 5 weeks that could change investor opinions. Important potential movers next week are CPI on Wednesday, PPI on Thursday and retail sales on Friday.
Issuance
It was a very slow week for issuance, as expected. There was one $700mm deal priced on Monday and then nothing until Friday morning. With two smaller deals pending on Friday the total issuance tally for the week will likely come in at ~$1.7bln once the dust settles. Next week could see some increased activity if Treasury volatility subsides but the bond market is closed on Monday in observance of Veterans Day and there are still be many companies that are in earnings blackout. These factors could result in a lighter new issue calendar.
Flows
According to LSEG Lipper, for the week ended November 6, investment-grade bond funds reported a net inflow of +$3.3bln. This was the 15th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$71.1bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads moved slightly wider this week but remain just 5 basis points off YTD tights. The Bloomberg US Corporate Bond Index closed at 84 on Thursday October 31 after closing the week prior at 82. The 10yr moved from 4.24% last Friday to 4.28% through Thursday. Through Thursday, the corporate bond index year-to-date total return was +2.77%. The yield to maturity on the corporate index has been boosted in recent weeks by higher Treasury yields and it closed Thursday at a YTM of 5.16%.
Economics
It was a busy week for economic data. The big takeaways were that the consumer is still spending and inflation is still sticky. The payroll report on Friday was a big miss in terms of jobs added but this report was not viewed as all that meaningful due to noise from hurricanes and labor strikes. All told, the data this week pushed Treasury yields slightly higher. As we move ahead to next week all eyes will be on the election on Tuesday which will be immediately followed by a FOMC rate decision on Wednesday afternoon. As we go to print, Fed Funds Futures are pricing in a 98.5% chance that the Fed delivers a 25bp cut.
Issuance
It was a solid week for issuance as IG-rated companies priced just over $27bln in new debt, capping the busiest October since 2021. Next week is likely to see little to no issuance, though it is possible some companies could give the market a look on Monday.
Flows
According to LSEG Lipper, for the week ended October 30, investment-grade bond funds reported a net inflow of +$3.21bln. This was the 14th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$67.8bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads moved wider this week after touching their snuggest levels of the year just 7 days ago. The Bloomberg US Corporate Bond Index closed at 84 on Thursday October 24 after closing the week prior at 81. The 10yr Treasury yield moved higher this week, cresting at a 3-month high on Wednesday. The 10yr moved from 4.08% last Friday to 4.21% through Thursday. Through Thursday, the corporate bond index year-to-date total return was +3.14%. The yield to maturity on the corporate index has inched back above 5% and closed Thursday at a YTM of 5.08%.
Economics
It was a benign week for economic data with little in the way of market moving prints. Existing home sales didn’t improve in September even as mortgage rates came down which was somewhat of a surprise but with no discernible market impact. S&P global PMI numbers were in line with expectations. Next week brings some more meaningful releases with GDP as well as personal income/spending and the all-important Core PCE. Looking ahead, the FOMC meets on November 7. Recall that there is no Fed meeting in the month of October.
Issuance
It was an underwhelming week for issuance, which is not something that we have been able to write very frequently throughout 2024. Companies priced just $12.1bln of high-grade bonds relative to the consensus estimate of $20bln. Treasury yields have moved higher over the past few weeks making issuance slightly less attractive for borrowers. We are also in the midst of corporate earnings meaning the window is closed for some companies. We expect another relatively quiet week ahead with the election fast approaching.
Flows
According to LSEG Lipper, for the week ended October 23, investment-grade bond funds reported a net inflow of +$1.88bln. This was the 13th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$64.6bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads moved tighter again this week and are now trading at the narrowest levels that they have seen in years. The Bloomberg US Corporate Bond Index closed at 79 on Thursday October 17 after closing the week prior at 81. The 10yr Treasury yield was less than a full basis point lower week over week through Thursday, trading at 4.09% into the close. Through Thursday, the corporate bond index year-to-date total return was +4.10%.
Spreads are Tight, and for Good Reason
It has become a common refrain among some investors who are quick to shout from the rooftops about how tight credit spreads are, especially as spreads have been grinding lower for the past month. The index is 22bps tighter since September 11 and the spread on the Corporate Index is at its lowest level since 2005. First, we would remind investors that tight spreads are not limited to investment grade and that they are tight across the entire fixed income universe. And why shouldn’t spreads be tight? Stocks are at or near all-time highs. The economy continues to hum along and a “soft landing” or “no landing” has become increasingly likely. Most especially, if the economy takes a turn for the worse, the vast majority of investment grade rated companies are in little danger of delivering any type of permanent impairment to their bondholders. This is not true in other sectors of the bond market like leveraged loans, junk bonds or private credit, all of which carry appreciably more credit risk for investors than the investment grade market.
Aside from a strong fundamental backdrop, there are also numerous technical factors that have been supportive of spreads.
The permanence of the foreign bid. Foreign investors are among the largest holders of US corporate bonds and while they haven’t been huge buyers in 2024, they also haven’t been sellers and have still been adding to positions at the margin.
Fund flows into the IG asset class have been roundly positive by all measurable sources. One source of fund flows that we track has shown positive inflows into IG funds in 36 of 42 weeks thus far in 2024.
Life and P&C insurance companies have been strong buyers of IG credit on the entire curve throughout 2024. Have you looked at your insurance bill lately? Premiums are up sharply in recent years and insurance companies invest the majority of these funds into investment grade fixed income in order to pay future claims.
Pensions need to be rebalanced and many are fully funded. With equity markets having posted strong returns in recent years pensions must divert more funds to their fixed income allocations in order to balance their overall portfolios. Also, there are many more pensions that are fully funded today relative to where they have been in the recent past –this leads the pension manager to take less risk, favoring asset classes like IG credit.
Lack of new issue supply in the final 10 weeks of the year could drive secondary spreads even tighter. It is well understood how strong corporate IG issuance has been thus far in 2024 but one of the reasons for this is the aforementioned demand factors. It seems unlikely that issuance can sustain its torrid pace through year end and if in fact it does slow then this could be another technical that could drive spreads tighter.
Finally, the main reason that spreads are as tight is a rather simplistic one: it’s all about yield. Many investors in the IG market are agnostic to the overall level of spreads and care much more about yield. These investors use IG credit to solve a problem. For example, they may have a liability coming due in 10yrs and they need a 5% annual return in a high-quality investment –there are many IG bonds that would satisfy that requirement. Credit spread is simply a component of your overall yield when you invest in a corporate bond. We have highlighted this throughout the year: the yield to maturity for the IG corporate bond index was 4.94% on Thursday afternoon. The average YTM for the index the past 10yrs was 3.63%. If you go back 20yrs that number was 4.16%. Each investor has their own suitability requirements but we think IG credit at ~5% is undeniably attractive, especially considering how infrequently this type of compensation has been available in recent years.
Issuance
It was a solid week for issuance during the holiday shortened week as companies priced $25.8bln of new debt. However, this fell short of the top end of estimates that were looking for as much as $30bln. Financial firms accounted for 100% of issuance this week which was widely expected by investors with banks hungry to issue debt on the back of earnings. Many of the banks printed strong quarterly earnings reports which led to enthusiastic investor demand for their new debt. We continue to expect issuance to slow over the next 17 days as the election draws nearer but syndicate desks are still looking for a respectable $20bln of issuance in the week to follow.
Flows
According to LSEG Lipper, for the week ended October 16, investment-grade bond funds reported a net inflow of +$2.17bln. This was the 12th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$62.7bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads inched tighter this week, breaching a new year-to-date low. The Bloomberg US Corporate Bond Index closed at 81 on Thursday October 10 after closing the week prior at 83. The 10yr Treasury yield was 9 basis points higher this week through Thursday, moving from 3.97% to 4.06%. Through Thursday, the corporate bond index year-to-date total return was +3.97%.
Economics
The highlights this week were led by CPI and PPI on Thursday and Friday, respectively. CPI came in a smidge hotter than expectations but it was not enough to meaningfully alter the outlook with regard to inflation and there was no real discernable impact to equities, credit or rates. The PPI data set was relatively tame and best described as in-line with expectations.
Next week is a light one from a data perspective with the only meaningful print occurring next Thursday morning with retail sales.
Issuance
It was a solid week for issuance as companies priced $16.1bln of new debt, besting the top end of the estimated range ($15bln). Bank earnings season is underway as of Friday and the big-six money center banks are expected to dabble in the primary market next week creating a wide range of estimates with dealers looking for $10-$30bln of new supply. Next week is a holiday shortened one with the market closed on Monday for Columbus Day. As the calendar rolls into the second half of October it would not surprise us if the new issue market took a breather heading into election season.
Flows
According to LSEG Lipper, for the week ended October 9, investment-grade bond funds reported a net inflow of +$1.83bln. This was the 11th consecutive week where the asset class reported an inflow. Total year-to-date flows into investment grade funds were +$60.5bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads traded within a narrow window this week and are 1 basis point better week over week. The Bloomberg US Corporate Bond Index closed at 90 on Thursday September 26 after closing the week prior at 91. The 10yr Treasury yield was higher this week through Thursday, up 5.5 basis points from where it closed last Friday. Through Thursday, the corporate bond index year-to-date total return was +5.22%.
Economics
There were some data points during the week to highlight. One of the most interesting under the radar prints was consumer confidence on Tuesday morning which fell the most in three years from the prior month’s reading. A closer look at the data showed that consumers were hesitant to spend with a labor market that has been showing signs of slowing amid persistently high costs of living. On Thursday there was a GDP release that showed that figure coming in at +3% for the second quarter. This was slightly better than the consensus estimate and economists are looking for an expansion of +2% in the third quarter. So, while GDP may be slowing, it is expected to remain in positive territory. The most anticipated release of the week was PCE and spending data on Friday morning. The Fed’s preferred inflation gauge and spending both rose at very modest levels which is likely to keep the Fed on track for another cut at its November 7th meeting, although there is still plenty of data that could sway them between now and then. Recall that there is no meeting in the month of October.
Next week is very similar to this week in that there are some meaningful data points but we will again have to wait until Friday for the main event which is the September payroll release.
Issuance
It was déjà vu all over again as issuance this week once again exceeded expectations. Companies brought $37bln of new bonds to market relative to the high end of estimates at $25bln. This capped off the busiest September on record at $168bln of monthly supply. The previous high-water mark was $164bln amid the pandemic borrowing binge of September 2020. Interestingly, according to sources compiled by Bloomberg, this was the fourth month this year where a record for monthly issuance volume was broken. The previous record setting months were January, February and July. More than 1.261 trillion of new debt has been priced in 2024 putting it a whopping +29% ahead of 2023’s pace. As we have written in previous commentaries it is somewhat of a goldilocks scenario for both borrowers and lenders (bond sellers and bond buyers) in that the prices paid are attractive for both parties. Absent any meaningful move in either direction for rates and/or spread we would expect this type of environment to persist although we could see a slowdown ahead of the November 5th presidential election.
Flows
According to LSEG Lipper, for the week ended September 25, investment-grade bond funds reported a net inflow of +$1.34bln. Short and intermediate investment-grade bond funds have seen positive flows 33 of the past 39 weeks. The total year-to-date flows into investment grade funds are +$55.1bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
Credit spreads moved meaningfully tighter this week with the index trading at its richest level since late July. The Bloomberg US Corporate Bond Index closed at 91 on Thursday September 19 after closing the week prior at 96. The 10yr Treasury yield drifted higher throughout the week, up 6 basis points from where it closed last Friday. The entire Treasury curve continued to steepen on the back of Wednesday’s policy rate cut by the FOMC. Through Thursday, the corporate bond index year-to-date total return was +5.58%.
Economics
The long awaited FOMC rate cut finally came to fruition this week. The Fed elected to kick things off with a 50bp cut. We would not call this a surprise, per se, but 25bps was what the market was looking for up until the middle of last week when the odds (Fed Funds futures) started to show an increasing likelihood of 50bps. The Summary of Economic Projections (SEP or Dot Plot) that was released at this meeting showed that a majority of FOMC members believe that there will be 50bps of additional cuts in 2024 and 100bps of cuts in 2025. The Fed does not meet in October so market prognosticators have extrapolated a 25bp cut at each of the November and December meetings. By all accounts it appears that the Fed was close to delivering a 25bp cut at its July meeting (there was no August meeting) and employment revisions and economic data since that time led them to “catch up” to the fact that they did not cut earlier by kicking things off with 50bps instead of 25bps. Remember that the September SEP is merely a forecast and does not necessarily reflect what will actually occur in the future. The SEP is only updated once every three months and simply reflects the median view of the FOMC members at a given point in time. That being said, 50bps of cuts in ’24 with an additional 100bps in ’25 sounds right to us given what we know today and what has been a resilient economy. We would also expect that at some point in 2025 the Fed may elect to end its balance sheet reduction (aka QT or quantitative tightening). The Fed kept its current plan in place for the time being where it will continue to allow $60bln of its balance sheet reduce each month. The current cycle of QT has reduced the Fed’s balance sheet from a peak of $9bln in mid-2022 to just above $7bln today, which is still elevated relative to pre-pandemic levels. The Fed’s balance sheet prior to March 2020 was just ~$4.25bln and prior to the 2008 financial crisis it was zero!
Next week is reasonably busy from an economic data standpoint. The highlights include consumer confidence, new home sales, GDP and the main event next Friday morning with core PCE.
Issuance
Issuance was light this week and underwhelmed relative to expectations as just $12.4bln of new debt was sold relative to the forecast of $25bln. In our view this “miss” can be explained by the mid-week Fed meeting and pull forward of issuance earlier this month as borrowers took advantage of a red-hot primary market in the days immediately following Labor Day. Dealers are calling for $20-$25bln of issuance next week. Over $131bln of debt has been priced so far in the month of September 2024. The five-year average for September is $136bln with the busiest year being 2020 when $164bln priced during the month.
Flows
According to LSEG Lipper, for the week ended September 18, investment-grade bond funds reported a net inflow of +$1.86bln. Short and intermediate investment-grade bond funds have seen positive flows 32 of the past 38 weeks. The total year-to-date flows into investment grade funds are +$53.8bln.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.
