Category: Investment Grade Weekly

17 Mar 2023

CAM Investment Grade Weekly Insights

Investment grade credit spreads will finish the week wider amid an extremely volatile tape.  The Bloomberg US Corporate Bond Index closed at 143 on Thursday March 16 after having closed the week prior at 136.  The 10yr Treasury is wrapped around 3.46% as we go to print which is 23 basis points lower than where it closed the prior week.  Through Thursday the Corporate Index had a YTD total return of +1.69% while the YTD S&P500 Index return was +3.6% and the Nasdaq Composite Index return was +11.9%.

The volatility over the past week has really been something to behold.  Few things are worse for risk assets than problems in the banking sector, which is the foundation of the global economy.  The failures of Silicon Valley Bank and Signature Bank are highly idiosyncratic in nature and not representative of systemic issues in our view.  Treasury Secretary Janet Yellen put it best in her testimony yesterday when she remarked that those particular banks had been grossly mismanaged.  As far as our banking exposure is concerned, we have a high degree of confidence in the banks that populate our investment grade portfolio.  Our approach to the banking industry has always been to focus on well capitalized institutions that have broadly diversified revenue streams and geographically diverse lending footprints.  The very nature of our methodology excludes regional banks and specialty banks because their loan portfolios are either too specialized or the footprint is too concentrated.  All of CAM’s banking exposure is confined to the 15 largest banks in the U.S.  We believe that the Federal Reserve will do whatever it takes to restore confidence and stability in the banking sector.

The primary market was totally closed this week which is unsurprising given the volatility in spreads and rates.  According to Bloomberg, this was the first week with no investment grade primary deals since June of 2022.  This is a testimony to how infrequently the IG market is “closed” to issuers.  We actually believe high quality companies could have issued this week if they had wanted to as demand for credit in the secondary market was still quite good but there was little incentive for corporate treasury departments and CFOs to stick their neck out and try to print a deal in a market where Treasuries and credit spreads were moving in double digit increments intraday.  We would expect to see some higher quality issuance next week if volatility subsides.

Investment grade credit reported its first weekly outflow of the year.  Per data compiled by Wells Fargo, outflows for the week of March 9–15 were -3.8bln which brings the year-to-date total of positive inflows to +$62.1bln.

 

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. 

03 Mar 2023

CAM Investment Grade Weekly Insights

Investment grade credit spreads are set to finish the week tighter amid a strong market tone this Friday morning.  The fact that spreads moved tighter this week is an impressive feat amid higher Treasury yields and an extremely active primary market.  The Bloomberg US Corporate Bond Index closed at 122 on Thursday March 2 after having closed the week prior at 123.  The 10yr Treasury closed above 4% for the first time this year on Thursday but it has since fallen below that threshold as we go to print on Friday morning.  Through Thursday the Corporate Index had a YTD total return of -0.05% while the YTD S&P500 Index return was +4.0% and the Nasdaq Composite Index return was +9.7%.

The slate of economic data this week was lighter relative to recent weeks but the data flow continued to have market participants erring on the side of caution with regard to Fed policy.  We would argue that this should have always been the case but many prognosticators seemed to be holding on to the belief that the Fed would be delivering rate cuts in the second half of 2023.  Although a reversal in policy later this year cannot be ruled out we think the prevailing mood has shifted over the past two weeks and at this point the consensus view is that the Fed will indeed be hesitant to slash its policy rate until it is very clear that inflation will not be a longer term concern.  Again, we think the Fed has been transparent about how this process would play out, but the market sometimes hears what it wants to hear.  Fed officials continued to be hawkish in interviews and speeches this week which should reinforce this view.

The primary market remains healthy as it had its busiest week of the year, not in terms of volume but in terms of the number of deals and tranches.  Volume too was impressive at just over $46bln printed relative to the high end of estimates which was $40bln.  Year to date, $310.74bln of new debt has been priced.  Syndicate desks are estimating $35bln in supply for the week ahead.

Investment grade credit reported its largest inflow in almost two months.  Per data compiled by Wells Fargo, inflows for the week of February 23–March 1 were +5.0bln which brings the year-to-date total to +$50.4bln.

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. 

17 Feb 2023

CAM Investment Grade Weekly Insights

Investment grade credit spreads look set to finish the week marginally wider.  The Bloomberg US Corporate Bond Index closed at 119 on Thursday February 16 after having closed the week prior at 118.  The 10yr Treasury moved meaningfully higher this week as the market has begun to anticipate a more hawkish monetary policy stance from the Fed for the balance of this year.  The 10yr is wrapped around 3.88% as we go to print up 15 basis points from 3.73%, where it closed the week prior. Through Thursday the Corporate Index had a YTD total return of +1.31% while the YTD S&P500 Index return was +6.8% and the Nasdaq Composite Index return was +10.7%.

Economic data was mixed this week but in concert with some Fed speakers we are definitely finishing the week with a tinge of hawkish rate fear.  Quite frankly most investors were probably a bit too optimistic about a soft landing for the economy and rate-cuts by the Fed later this year.  We are in the camp that there is little if any chance that the Fed will underestimate its progress against inflation thus making it a high probability event that they go too far and tighten financial conditions too much which will eventually lead to a recession.  It could be this year or next –predicting the timing and depth of the recession is the difficult part.  On Tuesday we got a CPI print that came in hotter than expected but the good news is that inflation continued to decelerate year over year.  On Wednesday we got a surprisingly strong retail sales number –this is after retail sales declined in both November and December.  Finally on Thursday, the U.S. Producer Price Index came in hot with January up 0.7% relative to expectations of 0.4%.  Housing starts were released as well and were down 4.5% y/y in January but this was easily overlooked by the market due to an increase in permitting activity which may filter through soon to housing starts leading to a bounce off the lows.  The housing picture is still quite grim for single family but it is multifamily that is seeing the vast majority of the permitting activity and it is multifamily construction that will at some point likely lead to a bounce of the bottom for housing starts.  Thursday also brought us a couple of hawkish speeches by Federal Reserve Bank president’s Mester and Bullard.  It is worth noting that Mester, who has repeatedly advocated for additional (and larger) rate hikes, is not currently a voting member for FOMC-rate decisions nor is St. Louis Fed President Bullard.

It was a big week for the primary market as issuers sold $54bln+ of new debt.  This was double the consensus estimate and points to continued strong investor demand for corporate credit.  Perhaps most surprising was that secondary spreads actually held in pretty well given the deluge of new issue supply and the relatively hawkish backdrop for risk throughout the week.  The largest deal of the week and was Amgen’s $24bln deal to help fund its acquisition of Horizon Therapeutics.  The Amgen deal was spread across 8 tranches spanning from 2-40 years.  The Amgen print was the 9th largest deal on record and at its peak the deal had over $90bln in orders. Monday is a holiday and the bond markets will be closed but investors are still expecting about $25bln of new supply next week.

Investment grade credit reported another week of inflows.  Per data compiled by Wells Fargo, inflows for the week of February 9–15 were +2.5bln which brings the year-to-date total to +$40.9bln.

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. 

03 Feb 2023

CAM Investment Grade Weekly Insights

Investment grade credit spreads moved meaningfully tighter this week as demand for IG credit remained consistently strong through the first month of the year.  The Bloomberg US Corporate Bond Index closed at 115 on Thursday February 3 after having closed the week prior at 119.  10yr Treasury closed the week prior at 3.50% and it is trading at 3.52% as we go to print but the benchmark rate did close as low as 3.39% on Thursday evening.  A strong jobs number on Friday morning caused the entire Treasury curve to give up the gains that were made on Thursday.  Through Thursday the Corporate Index had a YTD total return of +5.0% while the YTD S&P500 Index return was +8.9% and the Nasdaq Composite Index return was +16.6%.

There was much to process from a data standpoint this week.  The highlights were the FOMC rate decision on Wednesday which saw the central bank deliver a 25bp increase in Fed funds to a target rate of 4.50%-4.75%.  Chairman Powell’s press conference was relatively neutral and he avoided hawkish overtones but the message was also clear that the Fed will not rest until more progress is made in its fight against inflation.  The ECB was much more hawkish as it delivered a 50bp increase in its Deposit Rate and followed it up by pre-committing to an additional 50bp increase in March –the pre-commitment was somewhat surprising news for the market to digest.  The biggest news of the week was Friday’s U.S. unemployment report which showed that the economy added 517k jobs in January relative to the 188k consensus expectation.  The unemployment rate fell to 3.4%, its lowest level in more than 50 years.  While the increase in average hourly earnings slowed, the strong job growth number makes it more likely that the Fed will deliver another 25bp hike at its next rate decision on March 22. Not to be outdone the BOE also threw its hat in the ring with a 50bp hike of its policy rate but its commentary was more balanced and it did not fully commit to additional rate increases but it also did not take them off the table.

Primary market volume on the week came in at just over $18bln relative to the low end of the $20-$25lbn estimate.  Although volume was a little light relative to estimates, demand was extremely high for the deals that printed this week.  This has led to projections of $30-$35bln of issuance next week.  We anticipate some large deals next week if investor demand continues to remain strong.

Investment grade credit reported another solid week of inflows.  Per data compiled by Wells Fargo, inflows for the week of January 26–February 1 were +4.8bln which brings the year-to-date total to +$22.9bln.

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. 

20 Jan 2023

CAM Investment Grade Weekly Insights

Investment grade credit spreads moved tighter this week although the move is not yet fully reflected in the index which can lag at times.  The Bloomberg US Corporate Bond Index closed at 124 on Thursday January 19 after having closed the week prior at the same level.  Credit spreads continued to move tighter late Friday morning.  The 10yr Treasury closed the week prior at 3.50% and it is trading at 3.49% as we go to print.  Through this Thursday the Corporate Index had a YTD total return of +4.1% while the YTD S&P500 Index return was +1.6% and the Nasdaq Composite Index return was +3.7%.

There was a slew of economic data this week.  On Tuesday the Empire Survey for manufacturing in the NY region registered the fifth worst reading in its history.  Wednesday brought with it a retail sales release that showed a pullback in consumer spending.  Finally, existing home sales data was released on Friday which posted its 11th consecutive monthly decline and now worst annual drop since 2008.  Taken together, the economic data is showing that the Federal Reserve tightening of financial conditions is having its intended effect of slowing inflation but that it is also taking its toll on the economy.  Recall that the Fed will have its next FOMC rate decision on February 1 and at this point it is still unclear if 25 of 50ps of additional rate hikes will occur at that time.

Primary market volume was underwhelming this week as expected supply from the big six money center banks failed to materialize.  Issuance on the week was only $16bln+ while some estimates had called for as much as $40bln.  The estimates were probably too rosy in our view considering the market was closed on Monday for Martin Luther King Day.  Next week, prognosticators are looking for $20-$25bln in new supply.  The primary calendar will likely be slower the next few weeks until companies have had a chance to report earnings and exit their blackout periods.

Investment grade credit reported another weekly inflow.  Per data compiled by Wells Fargo, inflows for the week of January 12–18 were +3.8bln which brings the year-to-date total to +$12.6bln.

 

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. 

 

13 Jan 2023

CAM Investment Grade Weekly Insights

Investment grade credit spreads move tighter throughout the week.  The Bloomberg US Corporate Bond Index closed at 125 on Thursday January 12 after having closed the week prior at 132.  The 10yr Treasury closed the week prior at 3.56% and it is trading at 3.50% as we go to print on Friday afternoon.  Through this Thursday the Corporate Index had a YTD total return of +3.7% while the YTD S&P500 Index return was +3.8% and the Nasdaq Composite Index return was +5.1%.

There was a treasure trove of economic data this week with the crown jewel being the CPI release on Thursday morning.  Consumer prices rose 6.5% in the past 12 months through the end of December.  The Fed’s preferred metric of core inflation was up 5.7% over the same period which was the smallest increase in over a year.  The majority of market prognosticators believe that the CPI release increases the probability that the Fed will choose to raise its policy rate by 25 basis points on February 1 but 50 basis points remains a possibility.  There was more positive news on the inflation front in the consumer sentiment numbers that were released on Friday morning.  That data showed that respondents expect prices to increase just 4% over the next year.  This was the lowest reading for price expectations since April 2021.  There will be plenty of data to parse in the week ahead and the highlights include retail sales, producer price data and the NAHB housing market index.

The primary market had another strong week with more than $36bln in new supply pushing the total for January to $94.1bln.  Next week is shaping up to strong too as money center banks are expected to tap the debt markets as they exit earnings blackout.  The bond market is closed on Monday in observance of Martin Luther King Day but estimates are still calling for as much as $30-$40bln in new supply during the holiday shortened week.

Investment grade credit reported its largest weekly inflow in over two years.  Per data compiled by Wells Fargo, inflows for the week of January 5–11 were +8.4bln which brings the year-to-date total to +$10.5bln.

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. 

09 Dec 2022

CAM Investment Grade Weekly Insights

Investment grade credit spreads were mostly flat throughout the week without much change.  The Bloomberg US Corporate Bond Index closed at 130 on Thursday December 8 after having closed the week prior at 130.  Treasury volatility moderated this week as rates did not move materially for the first time in several weeks.  The 10yr Treasury closed the week prior at 3.49% and it is trading at 3.53% as we go to print.  Through this Thursday the Corporate Index had a YTD total return of -13.6% while the YTD S&P500 Index return was -15.6% and the Nasdaq Composite Index return was -28.8%.

The most meaningful economic data of the week was released this Friday morning.  U.S. producer prices rose more than forecast during the month of November.  This could lend credence to the case for additional Fed rate hikes but it was the smallest annual increase in PPI in 18 months so the Fed will be pleased to see that things are moving in the right direction. Also on Friday morning we learned that consumer sentiment improved and consumer concerns over inflation have eased over the course of the last month.  These data points were merely appetizers as a feast of economic data awaits us next week.  Things get started with the CPI release on Tuesday morning –if inflation comes in hotter than expected then it could make for a very volatile trading session.  On Wednesday afternoon we get an FOMC rate decision followed by rate decisions by the ECB and BOE on Thursday morning.  Each of these three central banks are expected to slow the pace of their rate hikes from 75bps to 50bps and if any of them deviate from this and surprise to the upside it could make for an interesting trading session.

The primary market had a slow week as it appears that most issuers have packed it in for the year.  Just $4.25bln in new debt was priced and if this pattern holds then it could be the lowest volume for a December in more than 15 years according to data compiled by Bloomberg.  The 2022 issuance tally stands at $1,180bln which trails 2021’s pace by ~14%.

Investment grade credit reported an inflow for the week.  Per data compiled by Wells Fargo, outflows for the week of December 1–7 were +1.0bln which brings the year-to-date total to -$160.2bln.

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. 

02 Dec 2022

CAM Investment Grade Weekly Insights

Investment grade credit spread performance was mixed throughout the week with spreads set to finish the week slightly wider.  The Bloomberg US Corporate Bond Index closed at 132 on Thursday December 2 after having closed the week prior at 130.  Treasuries continued to exhibit the same type of volatility that we have become accustomed to in recent weeks.  The 10yr Treasury closed last week at 3.68% and it is trading at 3.55% as we go to print.  The 10yr closed above 4% as recently as November 9, so this has been a significant move lower in yield over the course of only 15 trading days.  Through this Thursday the Corporate Index had a YTD total return of -14.3% while the YTD S&P500 Index return was -13.2% and the Nasdaq Composite Index return was -26.0%.

There was plenty of economic data to parse this week.  Things really started to ramp on Wednesday with a GDP print that morning that gave market participants some hope that inflation may be turning the corner and headed lower as the numbers showed slowing personal consumption and a core PCE figure that declined in 3Q relative to 2Q.  Chairman Powell gave a speech later that day at the Brookings Institution that indicated that the Fed was set to moderate the pace of rate increases at its meeting on December 14.  This sent stocks higher and Treasury yields lower.  We were surprised by this price action as a 50 basis point hike in December should not have been seen by the market as new information.  We believe that markets for risk assets are simply too eager for the Fed pivot when in fact chair Powell has been crystal clear that the Fed will not look to ease financial conditions through rate cuts until it is obvious that inflation is headed lower, closer to its longer term target.  The Friday nonfarm payroll report was stronger than expected and showed that the labor market continued to be strong in November.  Job gains and robust wage growth are not what the Fed was hoping to see and that data gives further credence to our belief that the Fed will not be in a hurry to cut its policy rate.  An elevated policy rate for a longer time period is not problematic for bond investors as it affords an opportunity to generate more income for new money and incremental purchases but it does make this exercise more difficult when the market is so quick to see any bad news as good news, sending Treasury yields lower in the process.

The primary market had a busy week as issuers priced more than $22bln in new debt.  Amazon led the way as it printed $8.25bln across 4 tranches.  The 2022 issuance tally stands at $1,176bln which trails 2021’s pace by ~13%.

Investment grade credit reported an outflow for the week.  Per data compiled by Wells Fargo, outflows for the week of November 24–30 were -$3.9bln which brings the year-to-date total to -$161.1bln.

 

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. 

10 Nov 2022

CAM Investment Grade Weekly Insights

Investment grade credit spreads were unchanged on the week until the CPI print sent spreads tighter on Thursday morning.  If this “risk-on” trade has legs, then spreads will finish the week in solidly positive territory.  The credit market is closed this Friday in observance of Veteran’s Day but equities will remain open.  The Bloomberg US Corporate Bond Index closed at 152 on Wednesday November 9 after having closed the week prior at 152.  Treasury yields are sharply lower on the week with the bulk of that move occurring after CPI at 8:30am this morning.  The 10yr Treasury closed last Friday evening at 4.16% and it is trading at 3.92% as we go to print.  Through Wednesday the Corporate Index had a YTD total return of -19.5% while the YTD S&P500 Index return was -20.3% and the Nasdaq Composite Index return was -33.4%.

It was a lighter week for economic data relative to the last few weeks due in part to the fact that there were only 4 trading days.  The big news of the week was CPI on Thursday, which was weak across the board.  Recall that the last couple of CPI prints came in hotter than expectations.  This is only one data point, so it cannot be called a trend, but it is a welcome relief to bond investors to see this number move in a favorable direction for a change.  The next CPI release is on December 13 and the next FOMC decision is on December 14.  There is also an employment report on December 2 as well as other economic data that will help guide the Fed.  It will be interesting to see if the data allows the Fed to take its foot off the gas and back off from 75bps to 50bps at its December meeting.

The primary market was extremely active this week as 28 companies issued over $45bln of new debt across just three trading days.  It is worth noting that the high yield primary market has thawed as well and it posted its busiest week since June.  There are no new investment grade deals pending as we go to print on Thursday morning.  The 2022 issuance tally stands at $1,125bln in volume which trails 2021’s pace by ~12%.

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. 

04 Nov 2022

CAM Investment Grade Weekly Insights

Investment grade credit spreads look as though they will finish the week slightly tighter.  The Bloomberg US Corporate Bond Index closed at 155 on Thursday November 3 after having closed the week prior at 158.  Treasury yields moved higher during the week.  The 10yr Treasury closed last Friday evening at 4.01% and it is trading at 4.17% as we go to print this Friday afternoon.  Through Thursday the Corporate Index had a YTD total return of -19.7% while the YTD S&P500 Index return was -20.9% and the Nasdaq Composite Index return was -33.5%.

It was an active week for central bankers and there was plenty of economic data to parse.  The FOMC raised the policy rate by 75bps for the fourth consecutive meeting, moving the benchmark to a target range of 3.75% to 4%.  This move was largely expected by markets but some investors may not have been sufficiently prepared for Powell’s comments which were perceived as hawkish in nature.  In our view this should not have come as a surprise as Fed officials have been consistently hawkish in recent weeks.  Powell did indicate that the committee may look to slow the pace of Fed Funds rate increases but that they are committed to seeing this through to the end in order to tame inflation.  We think that this level of commitment increases the probability that the economy will start to slow significantly in the months ahead.  Not to be outdone by the FOMC, the Bank of England was on the tape Thursday with a 75bps hike but its rhetoric was much more dovish than the U.S. central bank.  The BOE warned investors that market expectations for its terminal rate have overshot, and that while additional rate hikes may be required, the bank will be careful to limit the associated impact on economic growth.  The BOE expects that GDP for the UK will contract for eight consecutive quarters until mid-2024.  The final major piece of data came on Friday morning when the October jobs report showed that the U.S. labor market was still quite healthy.  Although the unemployment rate did tick higher from 3.5% to 3.7%, it is clear that the labor market was still too tight relative to FOMC expectations.  Futures contracts are pricing in a 50-basis point hike at the Fed’s December 14 meeting, but if the data over the next month does not paint a picture of slowing inflation then 75bps could be on the table once again.

Primary market activity in corporate credit was muted during the week.  Borrowers brought just over $12bln in new debt to market relative to expectations that were looking for $15bln on the low-end.  2022 has seen over $1,080bln in new issue volume which trails 2021’s pace by ~12%.

Investment grade funds reported a modest outflow for the week.  Per data compiled by Wells Fargo, inflows for the week of October 27–November 2 were -$0.4bln which brings the year-to-date total to -$147bln.

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.