Category: Investment Grade Weekly

Corporate spreads moved modestly wider during the week as BBB credit continues to underperform A-rated credit.

According to Wells Fargo, IG fund flows for the week of June 21-June 27 were +$1.3 billion.  IG flows are now +$69.387 billion YTD.

Per Bloomberg, it was the slowest week for the new issue calendar thus far in 2018, with only $2.4 billion in new corporate debt priced through Thursday.  This brings the YTD total to ~$595bn.

Treasury rates did not change materially this week and curves remain flat.

(Bloomberg) Fed Test Slaps Wall Street Titans, Unleashes Record Payout

• Tougher Federal Reserve stress tests forced some of Wall Street’s top banks to rein in ambitious plans for pumping out cash to shareholders. But even those diminished returns spell a record payout to investors.
• As the central bank’s annual stress tests ended Thursday, the nation’s four largest lenders — JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. — said they will distribute more than $110 billion through dividends and stock buybacks, sending their stocks higher. Even shares of Goldman Sachs Group Inc. and Morgan Stanley — which the Fed blocked from boosting total payouts — climbed in early trading Friday.
• The Fed’s decisions in the test provided some relief for investors after arecord 13 straight days of declines in the S&P 500 Financials Index. In the hours after clearing the test, more than 20 firms described how they’ll reward their owners over the coming four quarters. Wells Fargo plans to boost payouts more than 70 percent to about $33 billion, while JPMorgan signaled a 16 percent increase to $32 billion.
• The Fed also delivered some bad news. The regulator said it rejected initial proposals from six firms — JPMorgan, Goldman, Morgan Stanley, American Express Co., M&T Bank Corp. and KeyCorp — to make even higher payouts, forcing them to temper their requests. Never have so many firms taken that so-called mulligan to finish the exam.
• The Fed also failed a U.S. subsidiary of Deutsche Bank AG, citing “widespread and critical deficiencies” in its planning. The widely anticipated rejection limits the unit’s ability to send capital home to Germany and comes as senior executives try to bolster investor confidence. The Frankfurt-based firm said it’s working with regulators and making progress.

 (Bloomberg) Charter Pays Double-Digit Concession                     

• Domestic telecom company Charter Communications was the lone issuer to navigate what’s become a treacherous investment-grade primary market.
  • Compressing spreads 15bps, CHTR paid 10bps in new issue concession to print $1.5 billion split between 5.5-year fixed- and floating-rate notes when taking into account both their outstanding 22s and 25s.
  • New issue fatigue continues to grip the market as investors digest more than $31 billion in jumbo acquisition-related financing from Bayer and Walmart alone. After considering persistent headline risk from global trade tensions, sensitivities around Italy and an upcoming holiday-shortened week, activity is likely to remain muted until the week beginning July 9.
  • With just $2.4 billion pricing, we are on pace for the lightest volume week of the year. Prior to this, the last week of May held that distinction with $4.75 billion of sales.
  • It was surprising that a split-rated, high-beta telecommunications company elected to move forward today given the recent uneven broader market backdrop and weaker credit landscape.
  • Execution can best be described as mixed this week, highlighted by triple-B captive finance issuer Penske Truck Leasing’s 5-year deal stalling Tuesday, launching at initial price thoughts while the borrower was forced to pay elevated concessions.
  • As we saw over the last two active sessions, today’s final orderbook was less than 2 times covered.

(Bloomberg) In GE Overhaul, Once-Mighty Finance Arm Goes Out With a Whimper

• General Electric Co.’s finance business was once considered “too big to fail’’ by the U.S. government. These days, John Flannery is trying to make it too small to notice.
• The chief executive officer is selling the bulk of what’s left of GE Capital as part of an effort to remake the parent company into a less volatile — and much smaller — maker of aerospace and power equipment.
• When he’s done, the lending side, which GE has been downsizing since the financial crisis, will consist of a world-class aircraft leasing unit and not much else. It wasn’t that long ago that it offered everything from credit cards and commercial real estate loans to freight-train financing and pet insurance.
• Flannery’s plan, which also calls for spinning off the health-care division and backing out of the oil and gas market, would effectively complete the slow-motion breakup of a banking business that predecessors Jack Welchand Jeffrey Immelt had built into a Wall Street titan.
• Flannery, who spent decades in finance roles at GE, acknowledged the diminishing role of lending at the company but wouldn’t call it the end of GE Capital. After all, there’s still one big business left.
• GE Capital Aviation Services, better known as Gecas, is one of the world’s top plane lessors, with a fleet of almost 2,000 aircraft. The business generated $283 million in profit in the first quarter, while GE Capital overall lost $1.8 billion.
• Flannery has no plans to sell Gecas, which he argues is complementary to GE’s jet-engine manufacturing operations. Still, he said there’s a lot of external interest, giving GE “optionality” down the road. As he put it, potential acquirers “call us constantly.”

Trade concerns continued to weigh on debt and equity markets throughout the week. Spreads on the Bloomberg Barclays Corporate Index are 7 wider on the week as we go to print on Monday.  A deluge of corporate bond supply in the primary market has certainly helped to push spreads wider.  On Monday, Bayer printed a $15bln deal to fund its acquisition of Monsanto.  At the time, this was the second largest deal of the year, after the jumbo $40bln deal that CVS brought to market in early March.  Walmart would soon take the mantle of the second largest deal from Bayer as the retailer brought a $16bn deal on Wednesday to fund its acquisition of Indian-based ecommerce retailer Flipkart.

According to Wells Fargo, IG fund flows for the week of June 14-June 20 were -$1.4 billion. Even with the reversal in flows, IG flows are still positive at +$68.107 billion YTD.

Jumbo M&A led to one of the busiest new issue calendars that we have seen thus far in 2018. Per Bloomberg, over $43 billion in new corporate debt priced through Thursday.  This brings the YTD total to $636 billion.

(Bloomberg) Why Corporate Bond Liquidity Might Not Be as Bad as You Fear

• Banks’ shrinking corporate-bond holdings are partly a statistical mirage, according to a consulting firm. Some money managers and analysts believe it may be time to stop worrying about it.
• One measure of total dealer holdings of corporate bonds has dropped by around 90 percent since the crisis, a fact that has instilled fear in money managers for years. Dealers’ inventories of corporate bonds can be a shock absorber for the market: in times of trouble, banks can buy the securities from panicked sellers, hang onto them, and then offload them slowly, potentially preventing prices from plunging.
• But the decline in inventories is less dramatic than it seems because of a quirk in the data, consulting firm Tabb Group wrote in a recent report. The Federal Reserve Bank of New York statistic in question, primary dealer positions in corporate securities, fell to around $23 billion as of June 6 from around $265 billion in 2007. Much of that decline stemmed from the New York Fed narrowing the way it defined corporate bonds in 2013, when it appeared to have removed mortgage-backed securities without government backing from the mix, according to Tabb. On an apples-to-apples basis, inventories declined more like 35 percent to 50 percent for banks between 2007 and 2014, the consulting firm estimated.
• Inventories aren’t even the best measure to look at for assessing liquidity, Tabb Group said. What money managers care about is a bank’s capacity to buy securities, and the bigger a dealer’s inventory, the less ability it has to buy more. The average capacity at the six biggest U.S. banks for corporate bond underwriting fell just 16 percent between 2006 and 2017, according to Tabb, and most of the banks can take on even more risk if there’s a valid business reason to do so.
• Looking at the top 20 dealers, the decline in banks’ capacity from the pre-crisis era is closer to around 35 percent, Tabb estimates. But it’s not fair to completely blame rulemakers for these declines. There are good business reasons for banks to be less willing to hold the debt because interest rates are broadly rising, said Timothy Doubek, senior portfolio manager at Columbia Threadneedle Investments, which manages about $172 billion of fixed income assets.
• There are still reasons to be worried about how corporate bonds may perform in a downturn. The declines in inventories and capacity have come at a time when the amount of debt outstanding has surged: there were about $9 trillion of U.S. corporate bonds outstanding as of the end of March, according to the Securities Industry and Financial Markets Association, a trade group. That’s an increase of around 85 percent from the end of 2006.
• There’s no single way to define liquidity and it can vanish during times of stress. One measure known as the “bid-ask spread,” which looks at differences between the prices at which dealers will buy and sell a security, tends to grow wider when liquidity is low, and shrink when it’s strong. That spread is about as tight as it’s ever been.

There was no shortage of news in the market this week with political, economic and monetary policy events.  To top it off, on Friday morning we learned that the U.S. and China are now officially in the early innings of a potential trade war, which has pushed the debt and equity markets firmly into risk-off mode as we head to press.

According to Wells Fargo, IG fund flows for the week of June 7-May 13 were +$2.3 billion.  IG flows are now +$68.573 billion YTD.  Short and intermediate duration funds continue to garner assets while long duration funds have been shrinking this year.

Per Bloomberg, 23.37 billion in new corporate debt priced through Thursday.  This brings the YTD total to ~$592bn, which is down 8% year over year.

Treasury curves continue to flatten and are now the flattest they have been since 2007.

(CNET) Net neutrality is really, officially dead. Now what?

• The Obama-era net neutrality rules, passed in 2015, are defunct. This time it’s for real.
• Though some minor elements of the proposal by the Republican-led FCC to roll back those net neutrality rules went into effect last month, most aspects still required approval from the Office of Management and Budget. That’s now been taken care of, with the Federal Communications Commission declaring June 11 as the date the proposal takes effect.
• While many people agree with the basic principles of net neutrality, the specific rules enforcing the idea has been a lightning rod for controversy. That’s because to get the rules to hold up in court, an earlier, Democrat-led FCC had reclassified broadband networks so that they fell under the same strict regulations that govern telephone networks.
• FCC Chairman Ajit Pai has called the Obama-era rules “heavy-handed” and “a mistake,” and he’s argued that they deterred innovation and depressed investment in building and expanding broadband networks. To set things right, he says, he’s taking the FCC back to a “light touch” approach to regulation, a move that Republicans and internet service providers have applauded.
  • What’s net neutrality again?
    • Net neutrality is the principle that all traffic on the internet should be treated equally, regardless of whether you’re checking Facebook, posting pictures to Instagram or streaming movies from Netflix or Amazon. It also means companies like AT&T, which is trying to buy Time Warner, or Comcast, which owns NBC Universal, can’t favor their own content over a competitor’s.
  • So what’s happening?
    • The FCC, led by Ajit Pai, voted on Dec. 14 to repeal the 2015 net neutrality regulations, which prohibited broadband providers from blocking or slowing down traffic and banned them from offering so-called fast lanes to companies willing to pay extra to reach consumers more quickly than competitors.
  • Does this mean no one will be policing the internet?
    • The FTC will be the new cop on the beat. It can take action against companies that violate contracts with consumers or that participate in anticompetitive and fraudulent activity.
  • So what’s the big deal? Is the FTC equipped to make sure broadband companies don’t harm consumers?
    • The FTC already oversees consumer protection and competition for the whole economy. But this also means the agency is swamped. And because the FTC isn’t focused exclusively on the telecommunications sector, it’s unlikely the agency can deliver the same kind of scrutiny the FCC would.
  • What about internet fast lanes? Will broadband providers be able to prioritize traffic?
    • The repeal of FCC net neutrality regulations removes the ban that keeps a service provider from charging an internet service, like Netflix or YouTube, a fee for delivering its service faster to customers than competitors can. Net neutrality supporters argue that this especially hurts startups, which can’t afford such fees.

(Bloomberg) AT&T Closes Time Warner Deal After U.S. Declines to Seek Stay

• AT&T Inc. closed its $85 billion takeover of Time Warner Inc., the culmination of a 20-month battle for the right to enter the media business by acquiring the owner of HBO and Warner Bros.
• The completion of the deal came just hours after AT&T made a filing in federal court in Washington disclosing that it had reached an agreement with the Justice Department that waived a waiting period for closing.
• The agreement doesn’t prevent the department’s antitrust division from appealing the decision issued Tuesday by a federal judge rejecting the U.S. antitrust lawsuit against the deal. The government is still weighing whether to appeal the ruling, a Justice Department official said.
• AT&T’s completion of the takeover caps a nearly two-year effort to acquire Time Warner, the owner of CNN, HBO and Warner Brothers studio. The Justice Department sued in November to stop the merger, claiming the combination would raise prices for pay-TV subscribers across the country. After a six-week trial, U.S. District Judge Richard Leon ruled against the government’s case.

(Bloomberg) Powell Lauds Economy as Fed Nudges Up Interest-Rate Hike Path

• Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected.
• The so-called “dot plot” released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. The number viewing three or fewer hikes as appropriate fell to seven from eight. The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.
• Chairman Jerome Powell told reporters following the decision — which lifted the Fed’s benchmark rate by a quarter percentage point to a range of 1.75 percent to 2 percent — that the main takeaway was that “the economy is doing very well.” Powell also announced he plans to start holding a press conference after every meeting in January, cautioning that “having twice as many press conference does not signal anything.” The Fed chief currently speaks to reporters after every other meeting of policy makers.

(Bloomberg) Concho Resources Rides IG Upgrade Bump Again

• Exploration & production company Concho Resources was among Thursday’s top performers, pricing $1.6 billion across 2 tranches to help fund the RSP Permian acquisition. The issuer rode the momentum of its Moody’s ratings hike from HY to IG Monday pricing flat to its outstanding credit curve.
• CXO last accessed the debt capital markets in September pricing a whopping 25bps inside its curve after amassing more than $11 billion in orders. That deal came on the heels of an S&P upgrade to investment grade from HY.

(WSJ) Disney, Comcast Bids for Fox Assets Could Face Regulatory Sticking Point: Sports

• Comcast Corp. CMCSA and Walt Disney Co. DIS -0.54% are fighting to win over 21st Century Fox Inc. FOX shareholders and acquire major assets of Rupert Murdoch’s media empire. After the boardroom fight comes the next battle: winning over Washington.
• Both bids are expected to get a close look from antitrust regulators at the Justice Department, which earlier this week suffered a bruising loss when a judge approved AT&T Inc.’s acquisition of Time Warner Inc. with no conditions.
• The Justice Department’s antitrust chief said Wednesday he wouldn’t let the outcome deter him from challenging other deals. “I don’t think our case or evidence or theories were flawed,” Makan Delrahim said, adding that “a different judge could have ruled completely differently.”
• Comcast executives have begun reaching out to Fox and Comcast shareholders to make their case for the merger, people familiar with the matter say.
• Because Disney and Comcast, like Fox, produce television shows and movies, either deal would represent a horizontal merger, in which direct rivals combine, further limiting the number of competitors in the industry.
• The sports assets that would be combined in either a Disney-Fox or Comcast-Fox deal will get heavy scrutiny. Fox is selling nearly two-dozen regional sports networks including in New York, Los Angeles and Detroit. Its marquee property is the YES Network, the television home of the New York Yankees. Fox’s regional sports networks have been valued at $23 billion by industry analysts.
• Comcast’s nine regional sports networks carry local teams in major markets such as Philadelphia and Chicago. Its SNY, the home of the New York Mets, competes for advertisers with Fox’s YES. The addition of Fox’s channels would make Comcast the home for local sports in just about every major television market. That could potentially give it leverage in negotiations with other distributors for the rights to carry those channels. However, the channels for the most part don’t compete against one another.
• Disney doesn’t operate any local sports channels, but it owns ESPN, which has several national channels and rights to just about every major sport. The addition of Fox’s 22 regional channels could give it tremendous clout both locally and nationally with pay-TV distributors, sports leagues and advertisers.
• Neither proposed deal includes the Fox Broadcasting network, its local TV stations, the Fox News and Fox Business channels or the national sports channel Fox Sports 1. The broadcast businesses in particular would have likely made either deal virtually impossible to get past regulators because Disney owns ABC and Comcast owns NBC.

(WSJ) PG&E Cut To BBB By S&P; Still May Be Cut Further

• S&P said the cut reflects the incremental weakening of the business and financial risk profile after CAL FIRE’s determination that PG&E’s equipment was involved with 16 of the Northern California wildfires in late 2017.
• S&P said it could resolve the negative CreditWatch in the near term when CAL FIRE determines the cause of the Tubbs fire, or if there is a legislative solution to inverse condemnation that materializes in the legislative session ending August 2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of May 10-May 16 accelerated from prior weeks, with a positive inflow of $3.5 billion.  Short duration funds have registered 80% of all inflows over the past four weeks, according to Wells.  IG funds have garnered $65.764 billion in net inflows YTD.

Per Bloomberg, over $30bn in new corporate debt priced for the second straight week.  This brings the YTD total to $509bn.  The pace of new issuance is off 2% relative to this point in 2017.

(WSJ) The Era of Low Mortgage Rates Is Over

• Mortgage rates this week jumped to their highest level since 2011, signaling a shift from a period of ultracheap loans to a higher-rate environment that could slow home price appreciation and squeeze first-time buyers.
• The average rate for a 30-year fixed-rate mortgage rose to 4.61% this week from 4.55% last week, according to data released Thursday by mortgage-finance giant Freddie Mac.
• The concern among economists is that higher rates will prompt homeowners to keep their low-rate mortgages rather than trade up for better properties. As rates approach 5%, the risk of the phenomenon known as rate lock grows, economists said.
• A one percentage point increase in rates can lead to a reduction in home sales of 7% to 8%, according to Lawrence Yun, chief economist at the National Association of Realtors. The recent increases in home prices and mortgage rates could especially hurt first-time and moderate-income borrowers, economists said.
• The Mortgage Bankers Association expects refinancings to decline 26% this year, after plunging 40% last year.

(WSJ) What Do Tesla, Apple and SoftBank Have in Common? They’re All Hot for Lithium

• Tesla Inc. and a large Chinese firm each struck deals with lithium producers, the latest sign that big users are rushing to secure supplies of the material used in electric-car and cellphone batteries.
• Both lithium and cobalt, which is also used in these batteries, face potential shortages in the years ahead as electric-vehicle use increases.
• That concern is driving a number of companies like technology firms and car makers reliant on lithium and cobalt to strike deals now, even if it means joining with suppliers that haven’t started producing yet.
• In addition to the sector’s dominant players such as Glencore PLC and Albemarle Corp. , analysts estimate there are more than 100 smaller lithium miners and about 25 cobalt firms. Many are publicly traded in Canada and Australia, and some have already clinched deals with big users. “It just looks like we’re on the precipice of this wave,” said Chris Berry, founder of House Mountain Partners LLC, a New York-based adviser to battery-metals companies and investors. “You’re going to need a lot of investment in a hurry to meet demand.”
• But the rush to lock in deals could turn out to be a speculative bust. Prices of lithium and cobalt more than doubled from 2016 through last year, but the rally has cooled off recently amid worries about oversupply. Some investors also think manufacturers will replace pricey materials like lithium and cobalt using different types of batteries with a higher concentration of cheaper metals such as nickel.
• Analysts expect demand for the materials used to power electric vehicles and smartphones to more than double by 2025, pushing transportation and technology companies into exploring unconventional deals to meet that pressing need.
• Many lithium and cobalt mines are located in regions that have historically been unstable: Congo in the case of cobalt, and South America for lithium, adding to worries about a supply shortage.

(Bloomberg) U.S. Retail Sales Gain Points to Healthier Second Quarter

• S. retail sales rose in broad fashion last month as bigger after-tax paychecks helped compensate for rising fuel costs, signaling consumer demand was off to a firm start this quarter.
• The value of sales increased 0.3 percent in April, matching the median forecast, after a 0.8 percent advance in the prior month that was stronger than initially reported, Commerce Department figures showed Tuesday.
• So-called retail-control group sales, which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations, improved 0.4 percent after an upwardly revised 0.5 percent gain.
• The results add to the expectation that consumer spending, the biggest part of the economy, will rebound from its first-quarter weak patch. A strong job market and higher take-home pay in wake of tax reductions are buoying Americans’ wherewithal to spend and cushioning the squeeze from costlier fuel that leaves people with less money to buy other goods and services.
• Nine of 13 major retail categories showed advances in April, led by the biggest jump in sales at apparel stores since March of last year. Increased receipts were also evident at furniture merchants, building-materials outlets, Internet retailers and department stores.
• While consumer spending has remained solid in this expansion, business investment has also been posting strong growth in recent quarters. Tax cuts that President Donald Trump signed into law at the end of 2017 were seen as providing a further jolt to consumption and capital spending that would spur growth toward the president’s 3 percent goal.
• Economists including those at Bank of America Corp. and JPMorgan Chase & Co. have noted the recent runup in gasoline prices, and said persistently higher fuel costs this year would risk eroding a sizeable portion of the tax benefits.

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of May 3-May 9 were positive, with an inflow of $912 million.  According to data analyzed by Wells Fargo, IG funds have garnered $60.031 billion in net inflows YTD.

According to Bloomberg, $44.039bn in new corporate debt priced during the week.  This brings the YTD total to $478.934bn.  Per Bloomberg, this has been the highest weekly volume total since the week ended March 9, which included the $40 billion 9-part CVS deal to fund the Aetna transaction.

(Bloomberg) U.S. Yield Curve Flattest Since August 2007 as Long Bonds Soar

• The Treasury yield curve from 5 to 30 years flattened Thursday to the lowest level since August 2007, as a combination of weaker-than-expected U.S. inflation and solid demand for a record bond auction bolstered investor confidence in owning long-dated securities.
• The spread narrowed by more than 4 basis points, the most since February, dropping through a previous intraday low from April to 27.7 basis points. The gap between 2- and 10-year Treasuries also shrank in a bull flattening move.

• Investors and Federal Reserve officials alike have been on guard for the curve flattening toward inversion, which has historically preceded recessions. Yet bond traders are still pricing in more than two additional quarter-point rate hikes by year-end, betting policy makers will stick to their tightening path.

(WSJ) Cord-Cutting Pain Spreads to High-Yield Bond Market

• The consumer stampede to streaming media from traditional broadcasters is claiming an unexpected victim: high-yield bond investors.
• Telecommunications, cable and satellite companies have borrowed hundreds of billions of dollars in junk debt to build networks that would allow them to dominate their markets for decades to come.
• The proliferation of internet-based providers is upending that expectation, forcing investors to question the safety of bonds they bought from companies such as satellite broadcaster Dish Network, cable giant Charter Communications, and landline telecommunications company Frontier Communications.
• Defaults are low right now in telecommunications and media bonds, and some companies that offer broadband and wireless access actually benefit from the move toward streaming media.

(Bloomberg) U.S. Economic Growth Can Withstand the Threat From Rising Prices

• Want ads for truck drivers to haul crude oil in Texas are touting salaries as high as $150,000 a year. Some nurses are getting $25,000 signing bonuses. The U.S. unemployment rate just fell to 3.9 percent, one tick away from its lowest since the 1960s. And on May 8 the Bureau of Labor Statistics reported there are 6.5 million unfilled jobs in the U.S., the most on record. Some employers say they’re feeling the squeeze. “Rising labor costs remain the primary contributing factor to our margin erosion,” Chatham Lodging Trust, a company in West Palm Beach, Fla., that owns more than 130 hotels either by itself or in joint ventures, said on May 1.
• Is the U.S. economy overheating? Yes and no. There are plenty of inflationary bottlenecks, and not only in the labor market. Backlogs of orders are the highest since 2004, according to the Institute for Supply Management. Transportation costs have jumped in part because of driver shortages. Strong U.S. oil and gas production has helped push up the prices of essential inputs such as steel pipe and specialty sands used in fracking.
• On the other hand, the bottlenecks aren’t yet causing high inflation across the economy, which would require the Federal Reserve to speed up its interest rate hikes. The U.S. central bank passed up the opportunity to raise the federal funds rate at its May 1-2 meeting while noting that the rate of inflation has “moved close” to the bank’s 2 percent target. “In my judgment, the Fed is ready to accelerate [rate hikes] if they need to, but they’re not getting ahead, which I think is appropriate,” says Josh Wright, chief economist at ICIMS Inc., which makes software to find and hire talent.
• Some of the factors driving up the U.S. inflation rate—in particular, the jump in crude oil prices to about $70 a barrel from less than $50 a year ago—have external causes and don’t reflect overheating in the domestic economy. Rising commodity prices caused in part by new steel tariffs cost General Motors Co.and Fiat Chrysler Automobiles NV at least $200 million each in the first quarter. Tariffs have also helped drive lumber prices to a record. Other external factors are the high price of imported alumina for aluminum smelters and the weather-related runup in prices of vanilla from Madagascar and cocoa from Ivory Coast and Ghana.
• The U.S. economy performed below capacity for so long that it can be hard for managers to remember how to operate without lots of spare resources. Half of the surveyed members of the National Federation of Independent Business say there are “few or no” qualified workers for job openings. Yet on May 8 the NFIB reported that in April the net percentage of small-business owners who reported improved earnings trends was the highest in the survey’s history. “There is no question that small business is booming,” William Dunkelberg, NFIB’s chief economist, said in a statement. (Big companies are, too: First-quarter earnings for companies in the S&P 500 are expected to be 24 percent higher than a year earlier, Bloomberg calculated on May 9.)
• Sectors with strong pay growth generally confront special circumstances. Those truck drivers being offered as much as $150,000? They’re being hired by oil producers in the Permian Basin who are desperate to get their crude to market. Hospitals, whose median expenditures for contract labor rose 19 percent in the past year, face their own special problems, according to John Morrow, a managing director of Franklin Trust Ratings who analyzes hospitals. People whose skills are in high demand and work under temporary contract rather than salary can take full advantage of shortages for their talents, according to Morrow. “This is a level of skill that requires advanced-level training that involves medicine, technology, and science, and all of those things are costly,” he says.
• An important sign that rising costs remain manageable is that most companies haven’t passed them along to customers. Walmart Inc., the nation’s largest private employer, raised starting wages to $11 an hour in January and announced annual bonuses of as much as $1,000. But it’s cutting prices to remain competitive with Amazon.com Inc. and low-cost supermarket chains Aldi Inc. and Lidl US LLC. The same goes for packaged-goods companies. General Mills Inc. has acknowledged that attempts to hike prices for its Progresso soup and Yoplait yogurt ultimately hurt sales by driving shoppers to other brands. In freight transportation, BNSF Railway Co. has picked up market share from Union Pacific Corp. by underpricing it.
• “We have to be a little bit cautious in inferring that wage growth is going to be a major constraint for business,” says Gregory Daco, head of U.S. macroeconomics for Oxford Economics Ltd. While some economists warn that rising inflation is a “late-cycle” phenomenon—i.e., a precursor of recession—“we don’t have clear evidence that we’re at the end rather than the middle of the cycle,” says Michael Englund, chief economist of Action Economics LLC in Boulder, Colo.
• A key statistic to watch is unit labor costs, which are wages adjusted for productivity. They rose at an annual rate of 2.7 percent in the first quarter. But over the past year as a whole, the increase was only 1.1 percent. As long as companies’ unit labor costs don’t rise faster than the prices they charge, tight labor markets won’t be a problem.
• The Fed’s preferred measure of inflation, the price index for personal consumption expenditures, is going to look high for a few months because a brief dip in prices for clothing, hotel rooms, airline fares, and other items has ended, says Ian Shepherdson, chief economist of Pantheon Macroeconomics. That might influence the Fed, he says. There’s a risk that Fed rate setters could react too quickly to signs of overheating. “As inflation climbs, so too will the risk of recession, because at some point policymakers will feel impelled to respond,” Ellen Zentner, chief U.S. economist of Morgan Stanley, wrote in a note to clients on May 2.

Fund Flows & Issuance:  According to Wells Fargo, IG fund flows for the week of April 26-May 2 were positive, with an inflow of $2.6 billion. According to data analyzed by Wells Fargo, IG funds have garnered $59.1 billion in net inflows YTD.

According to Bloomberg, $21.775bn in new corporate debt priced during the week. This brings the YTD total to $430.595bn.

The Bloomberg Barclays US IG Corporate Bond Index closed on Thursday with an OAS of 111, a new YTD wide. The 10yr treasury rallied this week and now sits at 2.914% as we go to print, after reaching a high of 3.026% the week prior.

 (Bloomberg) U.S. Payrolls Rebound to 164,000 Gain; Jobless Rate Hits 3.9%

• U.S. hiring rebounded in April and the unemployment rate dropped below 4 percent for the first time since 2000, while wage gains unexpectedly cooled, suggesting the labor market still has slack to absorb.
• Payrolls rose 164,000 after an upwardly revised 135,000 advance, Labor Department figures showed Friday. The jobless rate fell to 3.9 percent, the lowest since December 2000, after six months at 4.1 percent. Average hourlyearnings increased 0.1 percent from the prior month and 2.6 percent from a year earlier, both less than projected.
• Despite the softer-than-expected wage reading, an unemployment rate drifting further below Federal Reserve officials’ estimates of levels sustainable in the long run may in their view add to upward pressure on wages and inflation. That would keep the central bank on track to raise interest rates in June for the second time this year and potentially one or two more times after that in 2018.
• The results may also reinforce forecasts for a rebound in economic growth this quarter after a slowdown in the first three months of the year, with the labor market supporting gains in consumer spending that may be further fueled by tax cuts. Companies in industries from services to manufacturing are hungry for workers, indicating hiring is likely to stay solid.
• The median estimate of analysts was for a gain of 193,000 jobs, with projections ranging from 145,000 to 255,000. Revisions to prior reports added a total of 30,000 jobs to payrolls in the previous two months, according to the figures, resulting in a three-month average of 208,000.

(Bloomberg) High-Grade Index Sets New 2018 Wide

• Credit continues to leak wider, underscored by the Bloomberg Barclays IG OAS index setting a new 2018 wide mark of +111 Thursday, a level not seen since September. The HY index also closed at the widest level in nearly a month. The IG primary market was active yesterday with more than $8 billion pricing, dominated by corporate borrowers.

(Bloomberg) Flipkart Board Is Said to Approve $15 Billion Walmart Deal

• The board of Flipkart Online Services Pvt has approved an agreement to sell about 75 percent of the company to a Walmart Inc.-led group for approximately $15 billion, according to people familiar with the matter, an enormous bet by the American retailer on international expansion.
• Under the proposed deal, SoftBank Group Corp. will sell all of the 20-plus percent stake it holds in Flipkart through an investment fund at a valuation of roughly $20 billion, said the people, asking not to be named because the matter is private. Google-parent Alphabet Inc. is likely to participate in the investment with Walmart, said one of the people. A final close is expected within 10 days, though terms could still change and a deal isn’t certain, they said.
• That would seal a Walmart triumph over Amazon.com Inc., which has been trying to take control of Flipkart with a competing offer. Flipkart’s board ultimately decided a deal with Walmart is more likely to win regulatory approval because Amazon is the No. 2 e-commerce operator in India behind Flipkart and its primary competitor. Amazon is out of the running unless Walmart hits unforeseen trouble.
• If completed, the deal will give Bentonville, Arkansas-based Walmart a leading position in the growing market of 1.3 billion people and a chance to rebuild its reputation online. The world’s largest retailer has struggled against Amazon as consumers increase their spending on the internet. India is the next big potential prize after the U.S. and China, where foreign retailers have made little progress against Alibaba Group Holding Ltd.

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of April 19-April 25 were positive, with an inflow of $3.5bn, driven primarily by ETFs, which posted their largest net inflow in over a year. According to data analyzed by Wells Fargo, IG funds have garnered $56.4 billion in net inflows YTD.

According to Bloomberg, $20.95bn in new corporate debt priced during the week. This brings the YTD total to $413.12bn.  Historically, May is typically a robust month for new corporate bond issuance and the general consensus on the street is that issuance will pick up in the month of May as companies exit earnings blackout.

The Bloomberg Barclays US IG Corporate Bond Index closed on Thursday with an OAS of 108, while the 10yr treasury breached the 3.00% threshold this week for the first time since January of 2014.

(Bloomberg) BofA Says Rising Rates Boost Appeal of High-Grade Bonds For Now

• The highest Treasury yield since 2014 is good news for the investment-grade corporate bond market, bringing back investors who’ve been put off by low payouts previously, Hans Mikkelsen, high-grade bond strategist at Bank of America Merrill Lynch, said in phone interview.
• “If you look at credit spreads, rates at these levels are positive for the investment-grade market, especially in the back end of the yield curve,” Mikkelsen said. “This market actually has quite a lot of yield-sensitive investors who buy more when rates go up, which makes it different than other asset classes.”
• These include insurance companies, pension funds, and foreign buyers, which will buy more since the rate rise this time is modest, controlled, and fairly contained, he said. “It would take a much further uptick for them to sell.”
• On the other hand, If returns deteriorate, “there might be more of a negative feedback loop” for bond funds and ETFs, because those funds would typically buy less, Mikkelsen added. “And if we went to 4% within two weeks, that wouldn’t be good either, as interest-rate volatility and uncertainty matters more to IG investors than the interest rate level itself.”
• Investment-grade spreads widened last night following the market close Wednesday. Treasury yields have fallen from highs yesterday, with 10-year back below 3%

(Advisor Perspectives) Dan Fuss – Only Two Things Can Stop Rates from Rising

• As his 60-year tenure attests, Dan Fuss is one of the most respected bond investors. In my interview with Fuss last week, he explained why it would take either a geopolitical crisis or an economic collapse to drive rates lower. Fuss also said investors should exercise caution in bond ETF markets that are exposed to liquidity shocks.
• According to Fuss, existing deflationary forces in the global economy would not be enough to drive rates lower.
• This is not the first time Fuss has forecasted higher rates. In October 2017, Fuss advised investors to exercise caution by building reserves, and suggested that they position themselves for an environment of rising interest rates. He also did so in October 2015, March 2015, and October 2013, causing his fund to miss the full benefit of bond rally in 2014. In April 2012 he made a similar, but incorrect, prediction.

(WPO) What Comcast’s $31 Billion Offer for a U.K. TV Company Tells Us About the Cable Giant’s Ambitions

• Comcast said Wednesday that it’s offering $31 billion to buy the British TV provider Sky, officially starting a bidding war between the U.S. cable giant and 21st Century Fox, which has offered $16.5 billion for the company.
• But why is a U.K.-based television company such a sought-after piece of property, and what could a deal mean for Comcast’s customers?
• The answer can be found in Comcast chief executive Brian Roberts’s remarks to investors on an earnings call Wednesday morning.
• “It’s a unique asset,” Roberts said. “It fits well with the assets we’ve already got. … A benefit is, you’d get new geographies and additional scale that gives you optionality.”
• In other words, a deal would give Comcast access to a bigger overseas audience and — according to industry analysts — new TV programming.
• Media and entertainment companies are increasingly consolidating — Time Warner, for example, is seeking to merge with AT&T for $85 billion. And it looks as though Comcast also is seeking additional opportunities in this space
• But unlike AT&T-Time Warner, which AT&T casts as a make-or-break bet as the telco tries to compete with Google and Facebook with a data-driven ad business, Comcast is emphasizing the optional nature of its offer for Sky. It’s simply a good opportunity and the best use of Comcast’s money right now, Roberts told analysts on the call.

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of April 12-April 18 were negative, posting an outflow of $1.2bn. According to data analyzed by Wells Fargo, IG funds have garnered $53 billion in net inflows YTD, which is less than half the amount of net inflows recorded in the first four months of 2017.

The IG new issue calendar saw its most active week since the week ending March 9^th.  U.S. banks led the way as they began to bring new bond deals coincident with earnings reports.  According to Bloomberg, $36.4bn in new corporate debt priced during the week.  This brings the YTD total to $392.17bn, which is down 14% year over year.  2018 issuance will see a significant impact pending regulatory reviews of large M&A deal such as AT&T/Time Warner and Bayer/Monsanto, among others.

The Bloomberg Barclays US IG Corporate Bond Index opened on Friday with an OAS of 106.

(Bloomberg) Dealers Kicking Abbott Debt to Curb Missed Out on Outperformance

• Abbott Laboratories’ debt has outperformed peers in 2018 following Moody’s upgrade and positive outlook in February.
• The Abbott Labs’ bonds have outperformed similarly dated BBB tier health-care and pharmaceutical debt by about 90 bps in 2018, including issues from Thermo Fisher, CVS and Mylan, driven by debt pay down and an upgrade by Moody’s in February.
• Dealers have been net sellers of Abbott debt over the past three months, notably at the front-end of the curve, including the 2.35% bonds due in 2019, 2.9% bonds due in 2021 and 3.75% bonds of 2026.

(WSJ) Morgan Stanley Posts Record Earnings, Revenue

• • Morgan Stanley MS on Wednesday reported record quarterly profits, the last of the big U.S. banks to benefit from a potent cocktail of lower taxes, active markets, lower expenses and economies growing in lockstep.
  • The Wall Street firm’s first-quarter profits of $2.6 billion and revenues of $11.1 billion were both record highs after reflecting accounting adjustments and jettisoned businesses. Morgan Stanley’s traders had their best quarter since 2009, riding a wave of increased volume and volatility that also aided rivals, including Goldman Sachs Group Inc. and JPMorgan Chase & Co.

• Combined profits at the six largest U.S. banks, which all reported first-quarter results in recent days, rose 24% from a year ago, outpacing an 18% rise in revenues. Meanwhile, the banks’ level of profitability as measured by the return they generate on their equity—a key gauge for shareholders—rose to its highest level in years.

• The first quarter is typically the strongest of the year for banks. Investors put on new positions, which boost trading results, and companies raise money to fund new projects, which spurs lending and underwriting.

(WSJ, Press Release) Crown Castle Reports First Quarter 2018 Results and Raises Outlook for Full Year 2018

• “After another quarter of very good financial and operating performance in the first quarter, we remain excited about the opportunities for our business to support growing data demand in the U.S.,” stated Jay Brown, Crown Castle’s Chief Executive Officer.
• “We continue to see tremendous activity across our unique portfolio of infrastructure assets. In our tower business, we have recently signed comprehensive leasing agreements with several of our largest customers, which we believe signals the beginning of a sustained period of infrastructure investments by our customers.
• In our fiber business, the volume of small cell bookings in the first quarter was comparable to what we booked during all of 2016, resulting in an increase in our contracted pipeline to more than 30,000 nodes. We also continue to make very good progress on integrating our recent fiber acquisitions.
• We believe our unique value proposition as a shared communications infrastructure provider will allow us to translate the growing demand for data into growth in cash flows and, thus, deliver on our 7% to 8% annual growth target in dividends per share.”+
• Crown Castle owns, operates and leases more than 40,000 cell towers and approximately 60,000 route miles of fiber supporting small cells and fiber solutions across every major U.S. market. This nationwide portfolio of communications infrastructure connects cities and communities to essential data, technology and wireless service – bringing information, ideas and innovations to the people and businesses that need them.

(Bloomberg) Global Yield Surge Defies Skepticism on Inflation’s Momentum

• Rising inflation expectations in the world’s biggest economy are pushing up U.S. benchmark yields, putting pressure on rates to climb around the world and causing more than a few heads to swivel.
• Federal Reserve officials may be attempting to tamp down concern of a U.S. price surge, but it hasn’t stopped yields from Tokyo to Frankfurt and New Yorkticking higher. In fact the yield of a $51 trillion Bloomberg Barclays index of global sovereigns and corporate debt is nearing a four-year high of 1.949 percent.

• Yet even as April’s surge in raw materials drives inflation bets and those higher yields, the moves are relatively gentle. Treasury long-bond rates remain below February highs, and that suggests bond traders are so far taking events in stride.
• “Actually there’s no overconcern yet in the market of inflation drifting dramatically higher — if you look at long, medium or short Treasuries,” said Joe Lovrics, Citigroup Inc.’s Iberia Markets head in Madrid. “In fact there’s a growing group talking about the U.S. economy actually cooling now.”
• Although Fed official Loretta Mester mentioned inflation 18 times in a preparedspeech Thursday, she concluded it probably won’t pick up sharply even as unemployment is likely to fall below 4 percent this year and remain there through 2019.
• In Europe, where the European Central Bank’s unconventional stimulus has been crushing rates since 2015, ECB President Mario Draghi is seen taking longer to lay out its plan to exit that program as protectionism threatens the euro-area outlook, economists said in a Bloomberg survey.
• While there has been some market excitement this year over the potential return of inflation and a possible bond bear market, a number of other factors having been fueling yield increases, according to Lovrics.
• “We’ve had an unexpected rally in oil, tax stimulus, strong employment in the U.S. plus Fed remarks about rising inflation, and this kind of feeds on itself,” he said.

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of March 15-March 21 were a positive $167 million, though flows have slowed now for four consecutive weeks. The data analyzed by wells shows that longer duration funds are gathering flows at the expense of shorter duration funds.  This is in contrast to Lipper data, where IG saw a solid inflow of $3.5bn versus the 4-wk Lipper average of +$1.6bn.  HY outflows continue, with Lipper reporting an outflow of $1.17bn taking YTD outflows to nearly $18bn for the HY asset class.

The IG new issue calendar saw $26.875bn price on the week, as Anheuser-Busch InBev led the way with a $10bn print across six tranches. Corporate issuance is down 18% y/y but there are several large M&A related deals waiting in the wings that could narrow this gap substantially in the coming weeks.  It is also likely that the market tone and renewed volatility in stocks and rates are keeping some issuers on the sidelines for the time being.

The Bloomberg Barclays US IG Corporate Bond Index opened on Friday with an OAS of 109, which is widest level yet seen in 2018.

(WSJ) ‘Rolldown’ Shows Why the Bond Market Is an Unfriendly Place to Hide

• For bond investors, a concept called “rolldown” is like a virtuous form of financial gravity, a force that generates returns without doing much work. A flattening yield curve, however, is threatening the physics that investors rely upon.
• The signals sent by the Federal Reserve Wednesday suggests the yield curve could flatten further: Its rate increases will raise short-dated yields, but there is still skepticism that rates in the long term will be materially higher.
• When the yield curve is steep, investors benefit from the yield on a long-term bond “rolling down” the curve. As a 10-year bond over time becomes a nine-year bond, all else being equal, its yield falls and its price rises, producing a gain above the initial yield when the bond is purchased. That offers protection for bond investors in a rising-rate environment, notes TwentyFour Asset Management.
• The U.S. yield curve still slopes upwards, with 10-year Treasurys yielding 0.57 percentage point more than two-year securities. But the further out you go, the flatter the curve gets. There is now only a 0.07 percentage-point gap between seven- and 10-year Treasury yields, a gap that has more than halved from a year ago. The potential for rolldown gains is small.
• A similar phenomenon is showing up in U.S. corporate bond markets too, with the gap between short- and long-maturity bonds shrinking in both yield and spread terms. A number of forces are potentially at play here, as with the rise in Libor rates.
• Higher U.S. Treasury bill issuance is competing for investors’ cash. And the pool of funding for short-dated debt may also have shrunk due to corporate cash repatriation, Citigroup suggests: if dollars can be repatriated and spent, they don’t need to be tied up in bond investments.
• By contrast, steeper curves in eurozone government and corporate bond markets may make them attractive to investors. The European Central Bank’s negative-rate policy, which it is in no rush to change, is acting as an anchor for yields, reassuring bond investors. Coupled with the cost for foreign investors to hedge dollar-denominated bonds, U.S. bonds lose out despite their higher yields. All of that may lead to tighter U.S. financial conditions.

(Bloomberg) Bayer Hopes to Close $66 Billion Deal With Monsanto in 2Q18

• Bayer continues to await antitrust clearance from the U.S. Department of Justice to close its proposed $66 billion purchase of Monsanto after having obtained all other necessary approvals. A DOJ decision is likely in 2Q. While Bayer agreed to sell or license about $7 billion worth of assets to BASF to ease antitrust concerns, additional measures may be needed for approval. Though this is more likely than not to be secured, if antitrust issues prevent it, Bayer will owe Monsanto a $2 billion fee.
• Bayer also has ongoing patent suits against generic-drug makers with respect to Xarelto (with J&J), Beyaz/Safyral, Betaferon/Betaseron, Damoctocog alfa pegol, Finacea, Nexavar and Staxyn. It’s involved in product liability litigation with respect to Yasmin, Mirenac and Xarelto. Other legal issues include environmental and tax matters. 

(Bloomberg) PG&E Has a Plan to Prevent More Deadly Wildfires

• Five months after wildfires ripped through Northern California’s wine country, PG&E Corp. has developed a plan to lower the risk of another outbreak.
• PG&E will establish new guidelines for proactively turning off power lines in areas where there’s extreme fire risk — a practice that regulators had asked about after last year’s events. The company will also keep trees and limbs farther away from power lines to meet new standards and expand its practice of disabling some equipment during fire season, according to an emailed statement Thursday.
• The announcement comes as state investigators probe whether PG&E power lines played a role in causing fires in Napa and Sonoma counties that destroyed thousands of structures and killed at least 40 people. The San Francisco-based company has lost more than a third of its market value amid investor concern that its equipment may have sparked the deadly blazes. No cause has been determined.