Category: Investment Grade Weekly

Credit spreads are poised to finish the week modestly wider.  The Bloomberg US Corporate Bond Index closed at 106 on Thursday December 7 after having closed the week prior at 105.  The 10yr is trading a 4.23% as we go to print Friday morning, just 3 basis points higher than its close the week prior.  Through Thursday, the Corporate Index YTD total return was +5.59%.

Economics

The most meaningful data release just occurred this Friday morning with the November payroll report.  It was a strong report that showed that the economy added more jobs than consensus estimates while the unemployment rate ticked lower to 3.7%.  Traders had become increasingly more aligned in the belief that Fed rate cuts were eminent in the first half of 2024.  This print along with continued labor market resilience in the future could bring the higher-for-longer narrative back to the forefront.  Indeed, Treasury yields inched higher across the board after the NFP release.  The 2yr was higher by 9bps as we went to print while the 30yr was higher by 5bps.  Next week is the last big week of the year for economic data with CPI on Tuesday, the final FOMC rate decision of 2023 on Wednesday and retail sales data on Friday.

Issuance

It was a seasonally strong week of issuance as borrowers priced more than $20bln of new debt, eclipsing the high end of the estimated range.  Next week syndicate desks are looking for $10bln in volume with most of that occurring on Monday.

Flows

According to Refinitiv Lipper, for the week ended December 6, investment-grade bond funds reported a net inflow of +$633.3mm.  Flows for the full year are net positive +$12.3bln.

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 will finish the week tighter and are currently at their tightest levels of 2023.  The Bloomberg US Corporate Bond Index closed at 104 on Thursday November 30 after having closed the week prior at 109.  The 10yr is trading a 4.29% as we go to print Friday morning, 18 basis points lower than its close the week prior.  Through Thursday, the Corporate Index YTD total return was +4.01%.  The month of November was particularly strong for spreads as the index has moved 25 basis points tighter since the end of October.  The performance of the rates market was also strong as Treasuries’ November gain was the largest since 2008.[i]  Monthly yield changes for UST benchmarks were as follows:

• 2Y -41bp
• 5Y -59bp
• 10Y -60bp
• 30Y -60bp

Economics

The calendar for economic data was reasonably busy this week.  The biggest print of the week is debatable but it was probably initial jobless claims on Thursday which came in exactly in line with expectations.  Jobless claims have been top of mind ever since the October NFP report that missed expectations to the downside.  There were other meaningful releases during the week, but none of the numbers were out of consensus enough to take the market by surprise: New Home Sales, Consumer Confidence, Core PCE, Personal Consumption, and Personal Income.  Not to be lost in the shuffle was Thursday’s 3Q US GDP release that showed the economy grew at a 5.2% annual rate at the end of that quarter.  While this is backward looking data, it is a long way from a recessionary GDP release.  The first half of next week is pretty light but the action starts to pick up on Thursday with jobless claims and then the November NFP report on Friday morning.

Issuance

It was a solid week of issuance as borrowers printed $17.5bln of new debt which was the midpoint of the estimated range.  Next week syndicate desks are looking for $15-$20bln of new issue volume.  In all likelihood the first week of December will be the busiest week of the month before the primary market starts to slow as the calendar moves closer to the holidays and year-end.

Flows

According to Refinitiv Lipper, for the week ended November 29, investment-grade bond funds reported a net inflow of +$324.8mm.  Flows for the full year are net positive +$12.357bln.

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.

[i]Bloomberg, December 1 2023, “Treasuries’ November Gain Biggest Since 2008: Rates Monthly”

Credit spreads are looking to finish the week tighter for the third time in a row.  The Bloomberg US Corporate Bond Index closed at 124 on Thursday November 9 after having closed the week prior at 125.  The 10yr is trading a 4.59% as we go to print Friday morning, just 2 basis points higher than its close the week prior.  Through Thursday, the Corporate Index YTD total return was +0.28%.

Economics

It was a relatively light week for market moving data.  Arguably the most meaningful print of the week was consumer sentiment data that was released on Friday morning.  The data showed that sentiment slipped to a six-month low but that consumer long-term inflation expectations increased to the highest level since 2011.  The Fed will likely be displeased with this development as consumer views on inflation can be a self-fulfilling prophecy.  Next week will be much busier on the data front with several notable releases, including the consumer price index, producer price index and retail sales.

Issuance

It was a very solid week for new issuance as borrowers printed $43.925bln in new debt, besting the high end of expectations that were calling for $40bln.  In total, 30 companies tapped the debt markets during the week.  Next week should be relatively active as well and estimates are looking for $25-$30bln in debt but issuers will have to navigate a busy calendar of economic data.  If that data results in Treasury and/or credit spread volatility then it could make issuance more or less attractive for borrowers.

Flows

According to Refinitiv Lipper, for the week ended November 8, investment-grade bond funds reported a net outflow of -$1.48bln.  Flows for the full year are net positive +$12.187bln.

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 for the second consecutive week.  The Bloomberg US Corporate Bond Index closed at 125 on Thursday November 2 after having closed the week prior at 128.  The 10yr is trading a 4.55% as we go to print Friday morning, 28 basis points lower on the week and 38 basis points lower since Tuesday evening.  Through Thursday, the Corporate Index YTD total return was -0.03%.

Economics

What a difference a few days make.  Markets for risk assets were relatively weak and listless as we closed things out on Tuesday Halloween eve but as we sit here Friday morning we are in the midst of the “Goldilocks” trade where both equities and bonds are simultaneously enjoying gains.  It was an action packed week with data from the Bank of Japan, U.S. Treasury Refunding, the Fed and then, last but not least, a U.S. employment report on Friday morning.   Here is a brief summary of the impact on markets:

BoJ – The Japanese central bank elected to keep its loose monetary policy intact.  The JGB 10yr continues to trade near its highest level in a decade in anticipation of a hiking cycle and the Yen fell to a 33yr low.  If the BoJ does eventually elect to tighten policy it could well result in higher yields across the globe, but markets are enjoying the reprieve for now.

UST Refunding – The Treasury announced that its upcoming auctions would be smaller than originally anticipated for longer dated maturities.  Investors took this as a positive and yields started to come in on intermediate and long duration Treasuries.

FOMC – The Fed kept rates stable, which is what the market expected.  The FOMC acknowledged tightening financial conditions.  Both the statement and the press conference were less hawkish than they have been recently.  Risk assets generally liked the result.

U.S. NFP – Lower than expected job numbers along with a revision lower for the prior month.  The unemployment rate climbed to 3.9% which is near its highest level in 2-years.

Taking it all together, investors now see a ~25% chance of another hike by January and have fully priced in a cut by June.[i]  We believe investment grade credit continues to offer an attractive value proposition.

Issuance

It was a busy week of issuance with weekly volume topping $30bln with one IG-rated deal pending on Friday morning.  Most of the volume this week came on Monday as 12 borrowers priced $22.5bln.  With Treasury yields moving lower throughout the latter half of this week we would expect next week to be a strong one for issuance and desks on the street agree with forecasts calling for as much as $40bln.

Flows

According to Refinitiv Lipper, for the week ended November 1, investment-grade bond funds reported a net outflow of -$2.760bln.  Flows for the full year are net positive +$13.667bln.

[i] Bloomberg, November 3^rd 2020, “Wall Street Revives ‘Goldilocks’ Trade After Data: Markets Wrap”

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 this week on the back of mostly positive earnings reports and muted primary supply.  The Bloomberg US Corporate Bond Index closed at 127 on Thursday October 26 after having closed the week prior at 130.  The 10yr is trading a 4.85% as we go to print Friday morning, higher by 6 basis points on the week.  Through Thursday, the Corporate Index YTD total return was -1.46%.

Economics

The data this week was largely positive and it painted a broad picture of a U.S. economy that remains resilient in the face of tightening financial conditions.  Some of the positive highlights this week included a +12.3% advance in new home sales (the largest increase in over a year), a Q3 U.S. GDP print that came in at a +4.9% annualized pace (at one point last year some economists had this as a negative print!) and then finally on Friday, we got a real personal spending number for September that came in at +0.4%.  It isn’t all peaches and cream though, for a few reasons.  As it relates to housing, mortgage rates remain stubbornly high and that is unlikely to change in a “higher for longer” environment.  This will continue to take its toll on existing home sales as fewer and fewer people will move residences, which casts a ripple effect through the economy. As far as consumer spending was concerned, we also got income numbers, and after adjusting for inflation, real income dipped for the fourth consecutive month in September.  There may be some excess savings still sloshing around in some pockets of the consumer economy but spending is unlikely to continue to increase if this trend of declining real income continues. Last but not least, we still have the potential for increased conflict in the middle east which can have wide ranging effects on commodity markets and risk assets.

Putting it altogether, the market concensus is that the FOMC keeps the benchmark rate steady at its meeting next Wednesday.  Interest rate futures are currently pricing in almost no chance of a hike/cut next week but pricing imples a +20.4% chance of a hike at the December meeting.

Issuance

It was a quiet week for issuance with just $5.8bln priced through Thursday with one deal pending on Friday morning which could to push the total closer to $7bln relative to expectations of about $20bln.  Even though it was a sizeable miss relative to estimates it is not too surprising given that we are in the heart of earnings season –1 or 2 large potential issuers that are lurking on the sidelines could have easily pushed the total north of $20bln.  Syndicate desks are calling for $15-$20bln of new supply next week. Year-to-date issuance is just north of $1 trillion, coming in at $1,035bln through Thursday.

Flows

According to Refinitiv Lipper, for the week ended October 25, investment-grade bond funds reported a net outflow of -$1.790bln.  October has been a tough month for bond funds with $5.9bln in outflows so far.  Flows for the full year are net positive +$16.426bln.

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.

Barring a stunning reversal, investment grade credit spreads will finish the week solidly wider.  The Bloomberg US Corporate Bond Index closed at 129 on Thursday October 19 after having closed the week prior at 124.  The 10yr is trading a 4.93% as we go to print Friday morning, higher by 32 basis points from the previous Friday close.  Through Thursday, the Corporate Index YTD total return was -2.53%.

Economics

It was a mixed bag for economic data this week.   The biggest surprise came on Tuesday which brought a Retail Sales print that defied expecations to the upside and painted a picture of a strong consumer that continued to spend in September.  On the other hand, housing related data remained sluggish.  Wednesday showed that US mortgage applications hit a 28-year low.  This was not a surprise, as mortgage rates flirted with 8% during the week while Thursday saw the 10yr Treasury close at 4.99%, its highest level since July of 2007.  Housing starts did show some signs of life, increasing by 7% during the month of September but overall homebuilder sentiment hit a 9-month low.  It is clear that, although housing prices have remained resilient, higher mortgage rates are having an impact on the housing market as whole.  Last but not least, WTI crude traded above $90 a barrel on Friday morning as traders fear war escalation in the middle east.

Issuance

It was a solid week for issuance, with banks leading the way, as the market digested $26bln in new supply.  New issue concessions were near 12bps on average this week, which are higher than they have been for some time –we like to see this as investors.  Next week, forecasts are calling for $15-$20bln of new debt, a more muted figure as companies continue to work through earnings.

Flows

According to Refinitiv Lipper, for the week ended October 18, investment-grade bond funds reported a net outflow of -$2.31bln.  October has been a tough month for bond funds with $5.9bln in outflows so far.  Flows for the full year are net positive +$18.2bln.

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.

Investment grade credit spreads look likely to finish the week modestly tighter.  The Bloomberg US Corporate Bond Index closed at 117 on Thursday September 21 after having closed the week prior at 118.  The 10yr is trading a 4.47% as we go to print Friday morning, higher by 14 basis points on the week.  Through Thursday, the Corporate Index YTD total return was +0.73%.

Economics

The biggest market moving event on the week was the Federal Reserve rate decision.  As expected, The Fed elected not to raise its policy rate, but its hawkish messaging may finally have started to resonate with investors as both stocks and Treasuries sold off after Chair Jerome Powell’s press conference.  We believe that a higher for longer rate environment is an opportunity for investment grade credit investors.  The Fed could proceed with additional hikes from here but there is wide agreement among investors and the Federal Reserve itself that we are near the end of the current hiking cycle. Even if we make a conservative forecast and assume three additional rate-hikes, the impact simply wouldn’t be that meaningful when the current base rate is 5.5%. The 10yr Treasury closed at its cycle high of 4.49% on Thursday.  With a Treasury of nearly 4.5% and a spread on the index of 117 new investors in our Investment Grade program are being compensated with a yield of >5.5% in a portfolio that has an index rating of A3 and a duration of around 7yrs.  In other words, an investor is being well compensated without taking a lot of credit risk and without taking a lot of interest rate risk.  If rates truly are “higher for longer” and simply trade sideways for a year or two then an investor will be compensated to wait for what comes next.  Maybe the next step is a soft landing?  In that scenario we could envision interest rates simply trading sideways and credit spreads would likely continue to perform well.  Conversely, we could get a hard landing scenario or a scenario where there is a modest recession.  In a recession scenario of any severity, the Fed is virtually guaranteed to cut its policy rate so an investor would benefit from lower rates although a recession usually means wider credit spreads –a scenario where total returns can actually be quite good for bonds if rate movement offsets spread movement.  The point of these examples is to show that the IG credit investor has a lot of cushion right now in terms of all-in yield.  There was a brief opportunity to put money to work in IG last fall with yields >6% and the market traded close to that level again this week.  For context, compare that to the average yield to worst on the IG index for the last 10yrs of 3.36%.

Issuance

It was a light week for primary issuance which is not unusual for a Fed-week.  Monday saw an active session with 11 companies pricing new debt but then activity fell off a cliff after that trading session.  All told, weekly volume finished at $16bln.  Next week, forecasts are calling for $15-$20bln of new debt.

Flows

According to Refinitiv Lipper, for the week ended September 20, investment-grade bond funds reported a net inflow of +$2.06bln.  This is the largest weekly inflow for IG in since June 22.  Flows for the full year are net positive +$25.9bln.

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.

Investment grade credit spreads drifted a touch wider mid-week before settling into a level that was mostly unchanged as we went to print on Friday.  The Bloomberg US Corporate Bond Index closed at 119 on Thursday September 14 after having closed the week prior at 119.  The 10yr was trading at 4.30% Friday morning, higher by 4 basis points on the week.  Through Thursday, the Corporate Index YTD total return was +1.76%.

It was one of the busier weeks for economic data that we have experienced in some time.  Monday and Tuesday where quiet before things picked up on Wednesday with August CPI that came in hotter than expected, although more than half of the increase in the numbers was attributable to gasoline.  On Thursday, Retail sales came in significantly higher than expected but also due in part to some help from fuel prices.  The control-group sales were much softer.  Like much of the economic data we have received throughout 2023, there were tidbits that fit the narrative of those in both the soft and hard landing camps.  Also on Thursday, the ECB delivered its 10^th and likely final rate hike: “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”  Finally, on Friday there was some good news in the U.S. as inflation expectations fell to the lowest level in over two years, with respondents seeing cost increases of +2.7% over the next five to ten years.  Next Wednesday, all eyes will be on the FOMC.  Most economic prognosticators expect that the Fed will keep rates steady.  The Fed’s dot plot shows one more increase at its November meeting but economists surveyed by Bloomberg think that the Fed will forego this final increase.

There was $34bln of new issuance on the week, which we would typically classify as a fairly busy week.  However, most of the supply this week, and for the month of September, has been somewhat niche-like in nature, failing to satisfy broader investor demand.  This month has seen a dichotomy of issuers with many smaller one-off issuers and then also a mix of serial issuers that tap the market frequently.  As a result, we believe that the month-to-date supply figure of $90bln is somewhat misleading.  Even though the actual dollar volume of supply has been solid thus far it has left many investors hungry for more because it hasn’t been the right fit for many market participants.  Next week should see an additional $15-$20bln of supply based on street estimates, a subdued figure relative to the past two weeks due to the FOMC meeting on Wednesday.

According to Refinitiv Lipper, for the week ended September 13, investment-grade bond funds reported a net inflow of +$233mln.  This is the first weekly inflow for IG in 4 weeks but flows for the full year are a net positive +$23.8bln.

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.

Investment grade credit spreads are slightly wider this week, although spreads for many individual corporate bonds are unchanged.  The Bloomberg US Corporate Bond Index closed at 120 on Thursday September 7 after having closed the week prior at 119.  The 10yr is trading at 4.22% this morning, higher by 4 basis points on the week.  Through Thursday, the Corporate Index YTD total return was +1.76%.

The holiday shortened week was a light one as far as economic data was concerned.  Next week brings much more meaningful data with CPI on Wednesday, Retail Sales and Core PPI on Thursday and Industrial Production numbers on Friday.  The FOMC enters media blackout tomorrow ahead of its next meeting and rate decision on September 20.

In contrast to economic data, the calendar for new issuance was anything but quiet.  Things got off to a hot start the first trading day of the week as 20 issuers blitzed the market, pricing $36.2bln in new debt.  It was the busiest day for the primary market in more than three years.[i]  This momentum carried into Wednesday and Thursday pushing the weekly total past $55bln.  Syndicate desks are expecting $30bln in supply next week, with Monday and Tuesday expected to be busy as issuers look to price debt ahead of Wednesday’s CPI print.

According to Refinitiv Lipper, for the week ended September 6, investment-grade bond funds reported a net outflow of -2.1bln.  Flows for the full year are a net positive +$23.5bln.

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.

[i] Bloomberg, September 5 2023, “IG ANALYSIS: 20 Price $36bn in Busiest Day in More Than 3 Years”

Investment grade credit spreads will finish the week wider.  The Bloomberg US Corporate Bond Index closed at 124 on Thursday August 17 after having closed the week prior at 119.  The 10yr is trading at 4.23% this morning, higher by 8 basis points on the week.  Through Thursday August 10 the Corporate Index YTD total return was +0.87%.  Although higher interest rates have weighed on returns in recent weeks, spreads have been resilient and the asset class has remained in positive territory as a result.

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Interest rates were at the forefront this week.  The 10yr Treasury touched its highest yields since 2008 after it closed one evening above 4.25%.  The average mortgage rate rose to 7.09%, its highest level in more than 20 years.[i]  Economic data on the week was strong, especially Retail Sales which showed a month on month advance of +0.7% relative to expectations of +0.4%.  The most recent Fed meeting minutes reinforced the narrative that rates may possibly be held at their current level (or higher) for an extended period.  It seems the move higher in rates is less about any one specific economic release and more about market participants coming around to the idea that the economy truly could experience a soft landing.  Bearish investors are tempering optimism about the economy by pointing to dwindling excess savings, resumption of student loan payments and consumer credit card borrowing that just surpassed an all-time high of $1 trillion.  There continue to be good arguments on both sides in the soft versus hard landing debate.

It was a light week for issuance as higher interest rates and squishy credit spreads likely kept some borrowers on the sidelines.  The next two weeks figure to be pretty light from a calendar perspective as we head into the final stanza of the summer season.  There has been $853bln of issuance year-to-date.

According to Refinitiv Lipper, for the week ended August 16, investment-grade bond funds reported a net outflow of -575mm.  Flows for the full year are a net positive +$27.5bln.

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.

[1] The Wall Street Journal, August 17 2023, “Mortgage Rates Hit 7.09%, Highest in More Than 20 Years”