Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$4.1 billion and year to date flows stand at -$48.3 billion.  New issuance for the week was $0.4 billion and year to date issuance is at $79.3 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds head toward a loss for the second consecutive week as investors pull $4.1 billion from US junk bonds for the second-biggest such withdrawal of the year on renewed concerns about recession.
• Yields surged and spreads widened across ratings for the second consecutive week, ending a rally that began in July and extended to the first two weeks of August.
• Junk bond yields rose 20bps this week to near 8%. Spreads widened 14bps to +446.
• BBs, the most rate-sensitive in the junk bond market, are moving toward a big loss in August, with month-to-date losses at 1.15% for the worst performing asset in the US high-yield market.
• BBs are on track to end with losses for the second straight week.
• CCC spreads have steadily climbed back to distressed levels widening 52bps week-to-date to +975. The index is also expected to end the week in red, with week-to-date losses at 0.78%.

(Bloomberg)  Powell Says History Warns Against Prematurely Loosening Policy

• Federal Reserve Chair Jerome Powell signaled the US central bank is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation, and he pushed back against any idea that the Fed would soon reverse course.
• “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
• He said restoring inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.
• “Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” he said.
• “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Powell said.
• Other Fed speakers in recent days have also pushed back against expectations, priced into futures markets, that the Fed would raise rapidly to a restrictive policy stance and then begin to ease.
• Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.
• Inflation according to the Fed’s preferred measure rose 6.3% for the 12-month period ending July, according to a government report released earlier on Friday , while the core measure minus food and energy rose 4.6%.
• “While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” the Fed chief told the audience.
• “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.”
• Fed officials in June projected rates rising to 3.4% by the end of this year, according to their median estimate, and 3.8% by end 2023. They will update those forecasts in September.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at -$44.1 billion.  New issuance for the week was $4.7 billion and year to date issuance is at $78.9 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are on track to end the six-week gaining streak after steadily falling for three consecutive sessions, with a week-to-date loss of 0.67%. Yields jump 16bps week-to-date to 7.59%, rising for the first time in seven weeks and the biggest weekly leap since early July after Federal Reserve minutes noted risks from the central bank tightening more than necessary. The losses stretched across the high yield market, with CCCs headed toward its first weekly loss, falling by a modest 0.29% and snapping the four-week rally. The losses followed a three-day decline, the longest losing streak in five weeks.
• CCC yields are headed toward the biggest weekly surge since July 1, rising 28bps week-to-date to 12.51%.
• Junk bond losses accelerated after mixed signals from different FOMC voting members, causing uncertainty over the extent of rate hikes in the coming months and its impact on growth.
• The primary market saw some borrowers rush in a hurry to take advantage of the risk-on move ahead of Jackson Hole symposium next week where the Fed could reiterate that it was focused on taming inflation and the fight against inflation continues.
• The issuance volume this week totals almost $5b, the busiest since early June.
• The month-to-date supply tally was at a modest $8b, the slowest August since 2014.
• The junk bond market may extend the decline on Friday amid a broader risk-off move. U.S. equity futures sank with Treasuries after a chorus of Federal Reserve officials reiterated their resolve to continue rate hikes and traders raised tightening wagers for other major central banks.

(Bloomberg)  Fed Officials Offer Mixed Signals on Size of September Rate Hike

• U.S. central bankers offered divergent signals over the size of the next interest-rate hike, with St. Louis’s James Bullard urging another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone.
• Bullard, who is one of the most hawkish policy makers at the U.S. central bank, told the Wall Street Journal in an interview published Thursday that he favored going big again, arguing “we should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation.”
• “I don’t really see why you want to drag out interest rate increases into next year,” he said.
• The Fed in July raised the target range for its benchmark rate by three-quarters of a percentage point to 2.25% to 2.5%, following a similar-sized hike in June to cool the hottest inflation in 40 years. Officials have since signaled that either 50, or another 75 basis points, were on the table for their Sept. 20-21 meeting, depending on the data. They get fresh monthly readings on inflation and employment between now and then.
• Both Bullard and George are voters this year on the rate-setting Federal Open Market Committee. But George, who hosts the Fed’s annual policy retreat next week in Jackson Hole, Wyoming, has sounded more dovish than Bullard in recent months, after many years of being viewed as a hawk.
• She backed the July hike but dissented in June in favor of a smaller half-point increase, citing concern the larger move could stoke policy uncertainty. Her remarks Thursday continued to tilt dovish.
• “I think the case for continuing to raise rates remains strong. The question of how fast that has to happen is something my colleagues and I will continue to debate, but I think the direction is pretty clear,” she said in Independence, Missouri.
• “We have done a lot, and I think we have to be very mindful that our policy decisions often operate on a lag. We have to watch carefully how that’s coming through.”
• George also noted that the Fed was shrinking its $8.9 trillion balance sheet while raising rates, which would also help to restrain the economy. The pace of decline steps up next month to an annual pace of around $1 trillion.
• Fed officials who have spoken since the July meeting have pushed back against any perception that they’d be pivoting away from tightening any time soon. They’ve made it clear that curbing the hottest inflation in four decades is their top priority.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and year to date flows stand at -$44.8 billion.  New issuance for the week was $3.5 billion and year to date issuance is at $74.7 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the sixth straight week of gains after steadily climbing in three of the last four sessions as yields plunge to a new two-month low of 7.44%. The six-week gain would be the longest winning streak in more than 18 months.  Yields are also on track to drop for the sixth consecutive week, the longest declining stretch in two years.
• The rally gained legs after strong jobs data last Friday and lower-than-expected consumer price index earlier this week eased fears of an imminent recession amid expectations that the Federal Reserve will slow down the rate-hike campaign from the aggressive 75bps hike in the last meeting.
• The market appears to be discounting negative news and focusing on the positives, Brad Rogoff and Dominique Toublan at Barclays Capital wrote on Friday.
• The gains extended across the high-yield market, with CCCs, the riskiest part of the junk bond market, poised to gain for the fourth successive week, the longest gaining streak in more than eight months. The week-to-date gains were at 1.59%, the best performing asset in the high-yield market.
• The total returns for BBs week-to-date were 0.49% and single Bs were at 1.08%.
• BB yields dropped below 6% to 5.99% and single B yields fell to a 10-week low of 7.64%.
• The rally was also partly due to technical factor, with inflows into junk bond funds looking to put money to work and a lack of supply.

(Bloomberg)  US Inflation Runs Cooler Than Forecast, Easing Pressure on Fed

• U.S. inflation decelerated in July by more than expected, reflecting lower energy prices, which may take some pressure off the Federal Reserve to continue aggressively hiking interest rates.
• The consumer price index increased 8.5% from a year earlier, cooling from the 9.1% June advance that was the largest in four decades, Labor Department data showed Wednesday. Prices were unchanged from the prior month. A decline in gasoline offset increases in food and shelter costs.
• So-called core CPI, which strips out the more volatile food and energy components, rose 0.3% from June and 5.9% from a year ago. The core and overall measures came in below forecast.
• The data may give the Fed some breathing room, and the cooling in gas prices, as well as used cars, offers respite to consumers. But annual inflation remains high at more than 8% and food costs continue to rise, providing little relief for President Joe Biden and the Democrats ahead of midterm elections.
• While a drop in gasoline prices is good news for Americans, their cost of living is still painfully high, forcing many to load up on credit cards and drain savings. After data last week showed still-robust labor demand and firmer wage growth, a further deceleration in inflation could take some of the urgency off the Fed to extend outsize interest-rate hikes.
• Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.
• Gasoline prices fell 7.7% in July, the most since April 2020, after rising 11.2% a month earlier. Utility prices fell 3.6% from June, the most since May 2009.
• Food costs, however, climbed 10.9% from a year ago, the most since 1979. Used car prices decreased.

Shelter costs — which are the biggest services’ component and make up about a third of the overall CPI index — rose 0.5% from June and 5.7% from last year, the most since 1991. That reflected a 0.7% jump in rent of primary of residence.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.3 billion and year to date flows stand at -$45.8 billion.  New issuance for the week was nil and year to date issuance is at $71.2 billion.

(Bloomberg)  High Yield Market Highlights

• The U.S. junk bond market is headed for the fifth week of gains after steadily edging higher for seven consecutive sessions, extending the July rally after a report eased concerns of an economic slowdown. This would be the longest gaining streak since December.  The week-long US junk-bond rally spurred telecom company Charter Communications to sell new bonds to bring some life back into the dormant primary market.
• Charter Communications rushed in to take advantage of the risk- on mood to sell bonds to fund a stock buyback, among other things. Investors, hungry for new bonds in an issuance-starved market, flooded it with orders for more than $4b for a $1b offering.
• The bonds priced at 6.375%, the lower end of talk. Bankers, led by Morgan Stanley, increased the size of the bond sale by $500m to $1.5b.
• The broader U.S. junk bond rally was due to a combination of factors.
• One, easing concerns about fears of an imminent recession following economic data earlier this week. S&P Global Ratings’ US chief economist Beth Ann Bovino echoed this sentiment and wrote that while macro economic conditions deteriorated or slowed down, there were no signs of an imminent recession yet.
• Two, investors have given their vote of confidence to the asset class as they flood US junk bonds with new cash. US high-yield funds saw an influx of over $3b for week.
• Three, the rally comes amid expectations that after perhaps another 75bps increase in the benchmark interest rate, the Federal Reserve will slow down the aggressive campaign of hiking rates while still curbing inflation and not causing a deep recession.
• U.S. junk bonds posted gains of 0.36% on Thursday and are on track to rally for the fifth straight week, with gains of 0.87% week-to- date.
• Yields dropped to a new eight-week low of 7.55% and spreads at +441.
• The gains spanned across all high-yield ratings, with CCCs posting gains of 0.65% on Thursday and is poised to be the best asset class for the week, with week-to-date returns of 1.72%.

(Bloomberg)  What Recession?

• The U.S. junk bond market is forecasting that the economy may weaken, but won’t tip into a recession.
• It comes as Federal Reserve officials vow to continue to fight inflation aggressively, even if higher rates increase the risk of recession. And some strategists and money managers think credit markets aren’t paying enough attention to how bad the potential upcoming downturn could be.
• But for now, investors are voting with their dollars. High-yield bonds gained 5.9% in July, their biggest one-month rally in a decade, and also rose in the first three days of August, according to Bloomberg index data.
• Risk premiums for the bonds stand at levels not usually associated with recessions. Stocks, junk bonds, and other risk markets rallied in the second half of July as investors grew more hopeful that signs of slowing growth would translate to the Fed easing up on its plans to tighten the money supply. A JPMorgan Chase model said this week that equity, credit and rates markets are together assigning a 40% probability to recession, down from 50% in June.
• Signs of slowing growth are coming from multiple areas. Walmart last week said shoppers are avoiding big-ticket items and focusing instead on buying groceries. AT&T said some customers are delaying paying bills. Pending home sales fell in June by the most since April 2020, according to a report last week.
• In markets, the 10-year Treasury yield was 38 basis points below the 2-year on Aug. 3, the most inverted since August 2000. Persistent inversions can signal a recession is coming. Commodities prices have broadly been falling this month, too.
• Riskier parts of the credit spectrum are also showing some concern. CCC rated bonds, among the lowest-rated corporates, gained 4.95% in July, while BB securities, the top tier of high yield, rose 6.1% on a total return basis.
• But it’s not clear if these signs of trouble will translate to a serious downturn.
• “The high-yield market is definitely pricing in some level of stress, but it’s pricing in nowhere near recession-type levels,” Citigroup strategist Michael Anderson said in a phone interview.
• Between December 1996 and December 2021, there were 28 months when the economy was in recession, according to an analysis by Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. The median junk-bond spread during those months was about 835 basis points, or 8.35 percentage points, based on ICE BofA indexes. That spread is currently closer to 454 basis points on August 3, around the median level for non-recession months, according to his analysis.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.4 billion and year to date flows stand at -$49.1 billion.  New issuance for the week was $0.7 billion and year to date issuance is at $71.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the biggest monthly gains in more than a decade as the July rebound solidified after Chair Jerome Powell signaled that rate hikes would slow at some point and policy wasn’t pre-determined. The month-to-date return was 5.11%, the biggest since October 2011. Yields tumbled 98bps to close at a seven-week low of 7.91%, the first monthly drop in 2022.
• The U.S. high yield market shrugged off the 75bps increase in the benchmark US interest rate for the second straight month, and the warning by the central bank that “another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data”.
• The riskiest segment of the junk bond market, CCCs, is poised for the biggest monthly advance since November 2020, with gains of 3.96% month-to- date.
• CCC yields plunged 75bps month-to-date to fall below 13% and close at 12.88%, the biggest monthly drop since December 2020 and also the first monthly decline in 2022.
• U.S. high yield investors flooded the asset class as the junk bonds reported a cash inflow of over $4 billion for the week. It was the biggest weekly intake since June 2020.
• The market appeared to interpret Chair Powell’s press conference as “dovish,” with futures pricing in a lower terminal rate than even the Fed’s own projections, Barclays strategists Brad Rogoff and Dominique Toublan wrote on Friday.
• Amid continuing macro uncertainty, the primary market has ground a near halt. The market priced a mere $1.8b, the slowest July since at least 2006.
• Year-to-date supply stood at almost $70b, the lowest since 2008.

(Bloomberg)  Powell Signals More Hikes Coming, While Markets Detect Pivot

• Chair Jerome Powell said the Federal Reserve will press on with the steepest tightening of monetary policy in a generation to curb surging inflation, while handing officials more flexibility on coming moves amid signs of a broadening economic slowdown.
• Policy makers again raised the benchmark US interest rate 75 basis points on Wednesday to a range of 2.25% to 2.5% and said they anticipate “ongoing increases” will be appropriate.
• Just how much depends on how the economy performs, the central bank chief said. He stepped away from the specific guidance on the size of upcoming hikes he previously gave, though he didn’t take another jumbo move off the table.
• “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data,” Powell said. “The labor market is extremely tight, and inflation is much too high.”
• Despite the whatever-it-takes message, markets staged a powerful rally with the S&P 500 stock index rising 2.6%, keying off Powell’s remarks that the pace of rate increases would slow at some point and that policy won’t be pre-determined.
• But Powell didn’t flag a pivot to lower rates or even a pause, according to Fed watchers, who argued there was a disconnect between what the central banker said and how markets responded.
• “We heard plenty of hawkish signals, including refusal to even contemplate that we are in a recession with strong job market gains and many references that restoring price stability is being prioritized over sidestepping a recession,” said Jonathan Millar, an economist with Barclays Plc. “Powell does not seem to be ruling out 100 or 75 basis-point hikes in September — it’s data dependent.”
• Central bankers are trying to tame the highest inflation in 40 years. Although the latest shift toward a more real-time approach to policy, Powell is trying to convey that the Fed will keep pushing borrowing costs higher as long as prices continue to jump too fast for comfort.
• Interest-rate markets are pricing a more benign hiking cycle than the Fed’s own June forecasts, which Powell pointedly said was the best current guide to the where officials see policy heading.
• Investors are betting that rates will peak around 3.3% this year before the Fed starts cutting modestly in 2023. Officials in June projected rates at 3.4% at year-end and 3.8% in December 2023.
• “By referencing the June Summary of Economic Projections he is not validating market pricing,” said Bloomberg’s chief U.S. economist Anna Wong. “The Fed is nowhere close to declaring victory over inflation.”
• In the post-meeting press conference, Powell was clear about the committee’s bias. “Restoring price stability is just something that we have to do,” he told reporters.
• “We do see that there are two-sided risks,” he said. “There would be the risk of doing too much and imposing more of a downturn on the economy than was necessary, but the risk of doing too little and leaving the economy with this entrenched inflation — it only raises the cost.”
• He said it wasn’t the committee’s intention to tip the economy into a recession, while noting that to achieve their 2% inflation goal slack would have to increase. That means unemployment would have to rise somewhat, while the economy would have to slow to below its full potential.