Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$28.0 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $49.1 billion.

(Bloomberg)  High Yield Market Highlights

• The U.S. junk bond market is set to close the week with losses after declining for three straight sessions and yields rose 25 basis points to a three-week high of 6.32%, rising 25bps week-to-date amid broader market volatility.
• “Risk assets sold off this week in light of increased hawkishness from the Federal Reserve,” Brad Rogoff, Barclays’ head of fixed income research, wrote on Friday.
• The primary market priced $6b this week to make it the busiest for new issuance in two months after the slowest first quarter since 2016, with just $43b
• Junk bond investors pulled cash from high yield funds in 11 of the 13 weeks in the first quarter, but are showing signs of demand again
• U.S. high yield funds report a modest inflow of $0.5b for the week, the second consecutive week of inflows

(Bloomberg)  Markets Bet on Sharpest Pace of Fed Tightening Since 1994

• Money-market traders are betting the Federal Reserve is heading for its most aggressive monetary-policy tightening in almost three decades as it fights a commodity-driven inflation spike.
• They are pricing in a further 225 basis points of interest-rate hikes by the end of the year on top of the 25 basis points delivered in March.
• Minutes of the Fed’s March meeting released Wednesday showed that “many” officials would have preferred to raise rates by a half percentage point but were deterred by Russia’s invasion of Ukraine. Only St. Louis Fed President James Bullard dissented in favor of a half-point hike. The Fed also signaled it will reduce its massive bond holdings at a maximum pace of $95 billion a month, further tightening credit to cool inflation.
• The Fed hasn’t done that much tightening — 250 basis points — in one year since 1994, a famously brutal year for bond investors that even included a 75 basis-point hike. The last year there was more tightening was in the early 1980s, when Paul Volcker was in charge of the central bank. Treasuries have already lost 6.7% this year, heading for the worst annual return since Bloomberg started compiling the data in 1973.
• With U.S. inflation heading for 8%, a rate not seen in 40 years, Fed officials have adopted a decidedly more hawkish tone. The latest move in market bets began Tuesday after Governor Lael Brainard said the central bank will continue tightening monetary policy methodically.
• In a reversal of a recent trend, the yield curve has steepened since Brainard commented Tuesday that the Fed will shrink its balance sheet “considerably more rapidly than in the previous recovery.” The 10-year yields traded 8 basis points higher than two-year notes, after dipping below the shorter-maturity rate last week for the first time since 2019. The curve inversion last week stirred concern that the Fed’s tightening may raise the risk of a recession over time.
• “The implication here is that over time, the balance-sheet reduction will lead to an increase in the term premium, which in turn will put upward pressure on the long end of the curve,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote in a note to clients.
• The minutes showed participates agreed that the maximum monthly reduction of its bond holdings, composed of $60 billion in Treasuries and $35 billion in mortgage-backed securities, would “likely be appropriate.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$3.9 billion and year to date flows stand at -$31.1 billion.  New issuance for the week was $2.8 billion and year to date issuance is at $39.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk-bond investors turned to fast-food operator Yum Brands in the primary market on Thursday after inflation concerns, a hawkish Federal Reserve and the war in Ukraine drove issuance to the slowest month in two years. Yum Brands sold $1b 10-year notes, rated Ba3/BB, at 5.375%, the lower end of price talk, after underwriters received orders more than $2.9b. The bond sale was increased by $500m to $1b.
• With yields volatile, borrowers are tapping the market when windows of opportunity arises to refinance or to fund acquisitions that have to close soon.
• YUM Brands sold primarily to refinance 7.75% 2025 notes that were callable on April 1.
• “The overall fundamentals are solid, with leverage back to pre- pandemic levels and higher interest coverage, which should provide a cushion against near-term macro risks and rising rates,” Barlcays’s strategist Brad Rogoff wrote on Friday.
• U.S. junk bonds held steady for the second straight session as yields and returns were largely flat and equities rallied amid a broader risk-on sentiment.
• While there was no serious loss of risk appetite or rising default fears priced into recent new issues, investors pulled cash out junk bond funds following a rise in yields and increased volatility.
• The U.S. high yield funds reported an outflow for the 11th consecutive week and the longest streak of outflows since 2007.

(Bloomberg)  Powell Is Ready to Back Half-Point Hike in May If Necessary

• Federal Reserve Chair Jerome Powell said the central bank is prepared to raise interest rates by a half percentage-point at its next meeting if needed, deploying a more aggressive tone toward curbing inflation than he used just a few days earlier.
• Policy makers raised the benchmark lending rate by a quarter point at their meeting last week — ending two years of near-zero borrowing costs — and signaled six more hikes of that magnitude this year, based on the median projection. Powell indicated that half-point hikes may be on the table when policy makers next gather May 3-4 and at subsequent sessions.
• “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said in a speech titled “Restoring Price Stability” to the National Association for Business Economics on Monday.
• Following his formal remarks, Powell was asked by the moderator if there was anything stopping policy makers from hiking by a half point in May, which would be the first increase of that magnitude since 2000.
• “What would prevent us? Nothing: Executive summary,” he said, drawing laughs from the audience. He added that such a decision had not been made, but acknowledged it was possible if warranted by incoming data.
• “My colleagues and I may well reach the conclusion that we’ll need to move more quickly and if so we will do so,” he said.
• Powell was more hawkish on Monday than at the press conference following last week’s meeting, indicating that if inflation continues to run hot he would favor a more aggressive pace of tightening. Last week he had to speak for the range of views among the 16 policy makers currently on the Federal Open market Committee.
• Markets heard the chair’s message and moved sharply in response, sending Treasury yields spiking higher as investors increased bets that the Fed will raise interest rates by a half point in May to confront the hottest inflation in 40 years.
• Goldman Sachs Group Inc.’s economists led by Jan Hatzius saw the comments as a hawkish signal and now expect the Fed to raise interest rates by 50 basis points at both its May and June policy meetings, followed by four 25 basis point increases in the second half of the year.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.4 billion and year to date flows stand at -$27.1 billion.  New issuance for the week was $1.0 billion and year to date issuance is at $36.4 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are poised to post the biggest weekly gains in almost three months after Fed Chair Jerome Powell highlighted the strength of the economy, fueling the largest three-day rally in equities since November 2020.
• As the Federal Reserve began what is likely to be its most aggressive rate-hike campaign in two decades, Powell said the economy was strong and well-positioned to withstand tighter monetary policy.
• Still, “a sustained rally will require more clarification about peak inflation and the economic ramifications of the ongoing Russia-Ukraine war,” Barclays’ strategists Brad Rogoff and Dominique Toublan wrote on Friday.
• The rates curve indicates that persistently higher inflation will lead to higher short-term rates and could weigh on longer-term growth prospects, Barclays wrote.
• The gains in high-yield debt were across the board, with CCCs, the riskiest part of the market, on track to close the week with the biggest advance in three months after rallying for two straight sessions.
• Junk bond yields dropped 17bps to 6.12% on Thursday and spreads tightened 17bps to +369.
• BB yields dropped 16bps to close at 5.01%, the biggest one-day fall in more than three months.
• The Ba index posted gains of 0.69% on Thursday, and is likely to see the biggest weekly returns in three months, with gains of 0.4% so far.
• The primary market was still quiet as borrowers wait for the markets to settle down after the FOMC decision to raise rates by 25bps, while indicating further 25bps hikes at each of the next six meetings.
• The issuance volume stands at $36b year-to-date, the slowest first quarter since 2016, according to data compiled by Bloomberg.

(Bloomberg)  Fed Lifts Rates a Quarter Point and Signals More Hikes to Come

• The Federal Reserve raised interest rates by a quarter percentage point and signaled hikes at all six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades even as risks to economic growth mount.
• Policy makers led by Chair Jerome Powell voted 8-1 to lift their key rate to a target range of 0.25% to 0.5%, the first increase since 2018, after two years of holding borrowing costs near zero to insulate the economy from the pandemic. St. Louis Fed President James Bullard dissented in favor of a half-point hike, the first vote against a decision since September 2020.
• “The American economy is very strong and well positioned to handle tighter monetary policy,” Powell told a press conference Wednesday following a meeting of the Federal Open Market Committee. “I saw a committee that is acutely aware of the need to return the economy to price stability.”
• The hike is likely the first of several to come this year, as the Fed said it “anticipates that ongoing increases in the target range will be appropriate,” and Powell repeated his pledge to be “nimble.”
• In the Fed’s so-called dot plot, officials’ median projection was for the benchmark rate to end 2022 at about 1.9% — in line with traders’ bets but higher than previously anticipated — and then rise to about 2.8% in 2023.
• “The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” the FOMC said in its policy statement following the two-day meeting in Washington, the first held in person — rather than via videoconference — since the pandemic began. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
• The Fed said it would begin allowing its $8.9 trillion balance sheet to shrink at a “coming meeting” without elaborating. Powell said officials had made good progress this week in nailing down their plans and could be in a position to begin the process at their May meeting, though the FOMC had not taken a decision to do so. The purchases of Treasuries and mortgage-backed securities, which concluded this month, were intended to provide support to the economy during the Covid-19 crisis and shrinking the balance sheet accelerates the removal of that aid.
• In new economic projections, Fed officials said they see inflation significantly higher than previously anticipated, at 4.3% this year, but still coming down to 2.3% in 2024. The forecast for economic growth in 2022 was lowered to 2.8% from 4%, while unemployment projections were little changed.
• The pivot to tighter monetary policy is sharper than policy makers expected just three months ago, when their median projection was for just three quarter-point rate increases this year.
• The Fed previously held off from raising rates as officials bet the inflation shock would fade once the economy returned to normal following the pandemic recession and lockdowns, though they were also cautious amid new Covid-19 variants and data showing a choppy jobs recovery.
• Instead, price gains accelerated amid a mixture of massive government stimulus, tightening labor markets, surging commodity costs and frayed supply chains. Powell has also been operating under a Fed policy framework, adopted in mid-2020, to allow some above-target inflation in the hope of broadening employment.
• President Joe Biden has called taming inflation his top economic priority, while fellow Democrats worry failure to restrain prices could cost them their thin congressional majorities in November’s midterm elections.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.3 billion and year to date flows stand at -$27.4 billion.  New issuance for the week was $0.5 billion and year to date issuance is at $35.4 billion.

 (Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the biggest weekly loss in 17 months as yields jump to a fresh 20-month high after inflation accelerated and the war on Ukraine intensified.
• Continuing volatility drove investors to pull cash from retail junk-bond funds for the ninth straight week, the longest losing streak since 2007
• U.S. high yield funds reported an outflow of $1.3b for the week
• The escalating war has increased the economic pressure on Russia, with the U.S. now calling for the end of normal trade relations, clearing the way for increased tariffs on Russian imports
• The sanctions are expected to spur inflation even higher and slow economic growth
• Bloomberg economist Anna Wong forecast that U.S. inflation could hit 9% as early as March or April with oil at $120 a barrel, and may end the year close to 7%
• Bloomberg economists have lowered 2022 U.S. GDP growth forecast to 2.5% from 3.6%
• The benchmark U.S. high yield index posts a loss of 1.29% week-to-date after reporting negative returns in three of the last four sessions
• The losses were across the board in the high yield market. BBs were leading the pack with week-to-date losses of 1.34%
• BB yields, the most rate-sensitive in the high yield market, also climbed to a 20- month high of 5.08% amid widespread fears of inflation disrupting growth
• CCCs are poised to post the least losses, with 1.20% week-to-date, while yields rose to a 16-month high of 8.82%
• The junk bond primary market has been quiet as borrowers have stayed away, waiting for some clarity on macro risks
• The primary market has slowed to a crawl
• The issuance volume was about $36b year-to-date, the slowest first quarter since 2009
• As of Friday morning, the markets may recover as U.S. equity futures edged higher amid reports that some progress is being made in talks between Russia and Ukraine

 (Bloomberg)  U.S. Inflation Hit Fresh 40-Year High of 7.9% Before Oil Spike

• U.S. consumer price gains accelerated in February to a fresh 40-year high, consistent with rapid inflation that’s become even more pronounced following Russia’s invasion of Ukraine.
• The consumer price index jumped 7.9% from a year earlier following a 7.5% annual gain in January, Labor Department data showed Thursday. The widely followed inflation gauge rose 0.8% in February from a month earlier, reflecting higher gasoline, food and shelter costs. Both readings matched the median projections of economists in a Bloomberg survey.
• Excluding volatile food and energy components, so-called core prices increased 0.5% from a month earlier and 6.4% from a year ago.
• The data illustrate the extent to which inflation was tightening its grip on the economy before Russia’s war brought about a spike in commodities, including the highest retail gasoline price on record. Most economists had expected February would be the peak for annual inflation, but the conflict likely means even higher inflation prints in the coming months.
• To combat building price pressures, the Federal Reserve is set to raise interest rates next week for the first time since 2018. At the same time, the geopolitical situation adds uncertainty to the central bank’s rate hiking cycle over the coming year.
• Fed officials could take a more hawkish stance if energy price shocks lead to higher and more persistent inflation, but they also may take a more cautious approach if sinking consumer sentiment and declining real wages begin to weigh on growth as the war drags on.
• The February report showed that gasoline prices rose 6.6% from the prior month and accounted for almost a third of the monthly increase in the CPI. Some of that may reflect energy price spikes resulting from the first days of Russia’s invasion during the last week of the month. The impact will be more fully captured in the March CPI report.
• So far this month, the retail price of a regular-grade gasoline has increased 19.3% to $4.32 a gallon, according to American Automobile Association data.

Food prices climbed 1% from the prior month, the largest advance since April 2020, the CPI report showed. Compared with February last year, the 7.9% jump was the biggest since 1981.

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$26.0 billion. New issuance for the week was $1.7 billion and year to date issuance is at $34.9 billion.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds are headed to the first back-to-back weekly gains since December with the risk-off mood easing after Federal Reserve Chair Jerome Powell said U.S. economic growth was strong enough to warrant a quarter-percentage-point interest rate hike this month.
• That buoyed a market that had been weighed down by uncertainty over the economic outlook and the scope of the Fed’s coming interest rate hikes; traders last month speculated that the Fed could begin with a half-point rate increase.
• Even as the war in Ukraine intensifies and commodity prices soar, credit market technicals have held up, Barclays’ strategist Brad Rogoff wrote on Friday, though he added that spreads could come under pressure near-term.
• While sustained higher energy prices pose downside risks to the outlook, Barclays does not view them as sufficient to derail the recovery, Rogoff wrote.
• Yields have been resilient through the week, closing unchanged at 5.66% week-to- date.
• The 5-year and 10-year Treasury yields fell about 13bps week-to-date at close yesterday at 1.73% and 1.84%, respectively.
• Spreads closed at +358bps, just up by 5bps
• Junk bonds gained across ratings for the second straight week, with 0.21% returns for BBs, 0.22% single Bs and 0.15% CCCs.
• CCCs have lost some momentum and were the worst performing segment for the second consecutive week, pushing single Bs to the top.
• U.S. high yield may be in a holding pattern as equity futures slide and European stocks tumble to a one-year low as war risks intensified. Oil, meanwhile, is headed for the biggest weekly surge in almost two years after Russia’s invasion of Ukraine roiled global markets. 

(Bloomberg) Powell Backs Quarter-Point March Rate Hike, Open to Bigger Moves

• Federal Reserve Chair Jerome Powell backed a quarter-point interest-rate hike this month to commence a series of increases and didn’t rule out a larger move at some stage, despite uncertainty caused by Russia’s invasion of Ukraine.
• “I am inclined to propose and support a 25 basis-point rate hike,” Powell told the House Financial Services Committee Wednesday. “To the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”
• Fed officials are pivoting to tackle the fastest inflation in 40 years and a few have publicly discussed the potential need to hike by a half point some time this year if inflation comes in too hot. They get February data on consumer prices on March 10, five days before they start their next policy meeting.
• While acknowledging the uncertainty posed by the attack on Ukraine, Powell said the need to remove pandemic policy support had not changed.
• “The bottom line is that we will proceed but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” he said.
• Investors increased their bets on the pace of rate hikes this year as the Fed chief spoke, pricing in around 140 basis points of tightening starting this month — which will mark the first increase since 2018. U.S. stocks advanced and 10-year Treasury yields rose on Powell’s message that the economy is expanding with enough force to withstand higher borrowing costs.
• Powell said the labor market is “extremely tight,” essentially a message to lawmakers that the central bank has met its maximum employment goal in current conditions, which opens the door to its inflation fight. He said employers are having difficulties filling job openings, while workers are quitting and taking new jobs, helping wages rise at the fastest pace in years.
• “We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability,” Powell said, restating a line he has used several times now that interprets the inflation fight in terms of preserving the expansion.
• The Fed chief said it wasn’t clear how high rates would have to rise to get inflation under control, in relation to the so-called “neutral” level that neither speeds up nor slows economic activity.
• “We talk about getting to neutral, which is a neutral rate which would be somewhere between 2% and 2.5%. It may well be that we need to go higher than that. We just don’t know,” he said, adding that he believed it was possible to deliver that tightening without causing a recession.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.3 billion and year to date flows stand at -$25.6 billion.  New issuance for the week was $1.0 billion and year to date issuance is at $33.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the sixth straight weekly loss as yields jump to a fresh 16-month high of 5.85% amid global market turmoil after Russia’s invasion of Ukraine. This would be the longest losing streak in more than six years.
• The primary market ground to a halt after pricing a little more than $9b this month, the slowest February since 2016. It’s also the slowest start to a year for issuance since 2016, with year- to-date volume at $33b.
• Rising yields and steady losses in junk bonds across ratings came amid broader market turbulence this year caused by inflation concerns, a hawkish Federal Reserve and geopolitical tensions.
• Given the lack of clarity on macro risks, “risk assets will be under pressure in the near term,” Barlcays’ strategist Brad Rogoff wrote on Friday.
• The BB index, the most rate-sensitive part of the high-yield market, is now set to post its eighth straight weekly loss, the longest period of losses since July 2013, after yields veered toward a 19-month high of 4.83%.
• CCCs, the riskiest part of the junk-bond market, is also headed to end the week with losses. This would be the sixth consecutive week of losses as yields rose to a new 15-month high of 8.53%.

 (Bloomberg)  What the Russian Invasion Means for Credit

• Russia’s invasion of Ukraine will translate to more trouble for corporate debt, money managers say. Some also wonder if the latest market weakness is a buying opportunity.
• For now, few market participants are taking that risk. Companies postponed bond sales in the U.S. and Europe on Feb. 24 and credit risk gauges surged after Russia invaded Ukraine.
• The military action heightened volatility in global bond markets already roiled by inflation and tightening monetary policy. Now oil prices are rising to their highest levels since 2014, and wheat prices in Paris hit a record. The result of inflation plus slower growth may be stagflation that can be terrible for corporate bondholders.
• “The escalated uncertainty in Ukraine, and the spike in commodity prices, moderates the outlook for global growth and therefore increases the risk for corporate credit,” said Matt Toms, chief investment officer of fixed-income at Voya Investment Management.
• Borrowers who could sell debt easily on any day for much of the last two years are now having to look for windows of relative calm. Price swings in secondary markets are widening.
• New sales of U.S. investment-grade and junk bonds will likely shut down for the remainder of the week, according to people familiar with the matter. BellRing Brands on Feb. 24 withdrew a junk-bond deal that it had started marketing earlier in the week.
• U.S. leveraged loan prices fell 1/2 to a full point in muted secondary trading on Feb. 24, according to people familiar. Meanwhile, a gauge of U.S. credit risk spiked, with the cost to protect a basket of investment-grade dollar bonds against default rising to the highest level since July 2020.
• But even if the global growth picture is concerning, few U.S. companies will be severely affected by the invasion at this stage, investors said.
• “The entire global economy is going to be impacted by Russia and Ukraine, but there’s not really going to be a lot of direct impact in the U.S., in terms of issuers whose results are going to be directly impacted by what’s going on there,” said Jeremy Burton, a portfolio manager at Pinebridge Investments.
• Prices on investment-grade bonds now may end up being a great deal in retrospect, said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors.
• “Keep your eyes on the long-term and don’t get sucked into the abyss of negativity,” Elfner said. “Short-term blips in volatility and weakness in financial markets tend to be long-term buying opportunities.”