Category: Insight

(Bloomberg)  High Yield Market Highlights

• The US junk bond market is headed toward the third week of gains largely propelled by the riskiest part of the junk market even after the Federal Reserve left the door open for future hikes. The CCC segment is on track for the biggest weekly gains since mid-April at 1.2%.  Easing concerns about an imminent recession after Fed revised the growth forecast for 2023 to 1% — up from the March projection of 0.4% — pushed CCC yields to a four-month low of 12.84% after steadily declining for seven sessions in a row. That’s the longest falling streak since mid-January. CCC spreads also dropped to a four-month nadir of 859 basis points after falling for three consecutive sessions.
• US junk bonds rallied across the board. Yields tumbled to a six-week low of 8.53%. Spreads closed at 408 basis points.
• BB yields fell to a two-week low of 7.05% and single-Bs to a six- week low of 8.74%.
• BBs extended gains for the third straight session, with week-to-date returns at 0.28%. Single Bs rallied for six sessions in a row and are on track post gains for the third consecutive week, with week-to-date returns at 0.42%.

(Bloomberg)  JPMorgan’s Michele Says Exit ‘Cash Trap’ for Bonds on Rate Call

• It’s time to exit the “cash trap” of money market funds and move into bonds as the Federal Reserve is set to pause its rate-hike campaign and then cut as soon as September, according to Wall Street veteran Bob Michele.
• “If we are right and we’ve seen the last Fed rate hike and the market starts pricing in rate cuts and they start cutting rates, then those cash returns will start to evaporate,” Michele told Bloomberg Television’s The Open on Wednesday. With a switch to bonds, “you will have locked in not only the carry but will also get some capital appreciation,” he said.
• The chief investment officer for global fixed income at JPMorgan Investment Management Inc., who has previously recommended five-year Treasuries and US investment-grade corporate bonds, said the central bank is set to hold rates “where they are” when its policy-setting committee meets on Wednesday. Michele sees the US economy entering a recession within a year as unemployment rises.
• “Unemployment at 4.5% is recession, I don’t think there’s ever been a jump of 1.1% in unemployment and the NBER (National Bureau of Economic Research) hasn’t come in and said we’re in recession,” Michele said. “So the Fed is predicting recession there.”
• Price pressures haunting the Fed will continue to fade, according to Michele, who sees the disinflationary trend as “intact.” Tuesday’s consumer price index report showed inflation decelerating, followed by US producer prices declining in May, bolstering expectations that the Fed will be on hold this month.
• The market for wagers on the outlook for central bank policy shows traders now expect the benchmark rate to peak in September, instead of July.
• “We have never gone from the last rate hike to recession without the Fed cutting rates before then,” Michele said. “If everything we are seeing is telling us a recession by year-end, I am still sticking with September as the first rate cut.”

(Bloomberg)  Powell Says Nearly All Officials Expect ‘Some’ Further Fed Hikes

• Federal Reserve officials paused on Wednesday following 15 months of interest-rate hikes but signaled they would likely resume tightening at some point to cool inflation.
• “Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy,” the Federal Open Market Committee said in a statement released in Washington Wednesday.
• The decision left the benchmark federal funds rate in a target range of 5% to 5.25%.
• The FOMC vote was unanimous. Of the 18 policymakers, 12 penciled in rates at or above the median range of 5.5% to 5.75%, showing most policymakers agree further tightening is needed to contain price pressures. The forecasts imply officials expect two additional quarter-point rate hikes or one half-point increase before the end of the year.
• Chair Jerome Powell said nearly all Fed officials expect it will be appropriate to raise interest rates “somewhat further” in 2023 to bring down inflation. He declined to say whether another hike could come as soon as July.
• “Inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go,” Powell said at a post-meeting press conference.
• The committee “judged it prudent” to hold rates steady this month given how quickly rates have risen, he added, saying the pause is a continuation of the moderating pace of policy measures.
• “We’ve covered a lot of ground and the full effects of our tightening have yet to be felt,” the Fed chief said.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are heading for a modest weekly gain as investors debate whether the Federal Reserve will pause its tightening campaign or keep rates higher for longer following the example of the Bank of Canada.
• Signs of bullish sentiment can be seen as US high yield funds reported a cash haul of $2.5b for week ended June 7, according to Refinitiv Lipper, marking a U-turn after investors pulled $4.7b in four of the five weeks in May.
• The week-to-date gains are 0.16%.
• Yields rose seven basis points week-to-date to 8.61% and rose in two the last four sessions after dropping for two consecutive weeks.
• While the high yield market slowed down a tad this week, CCCs outperformed BBs and single Bs, with week-to-date returns of 0.73% compared to a loss of 0.1% and a gain of 0.3% in BBs and single Bs, respectively.
• CCC yields dropped 6 bps on Thursday to close at 13.22%. Yields fell in two of the last four sessions.
• CCCs have been some of the best performing assets in the US corporate debt market this year, with year-to-date returns of 7.62% compared with 2.59% in investment grade, and BBBs in particular, with 2.76%.
• Risk assets have rallied materially in the last couple of weeks on strong technical backdrop, Barclays’s strategists Brad Rogoff and Dominique Toublan wrote this morning. The rally has been helped by a combination of higher yields and lower tail risk expectations, they wrote.
• The primary market priced more than $4b this week as borrowers took advantage of the risk-on sentiment.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed toward the third straight week of losses and the biggest weekly loss in more than two months, pushing yields to a seven-week high on worries over negotiations to raise the debt ceiling. The week-to-date loss is 0.45%.
• The losses spanned ratings categories. US high yield funds reported an outflow of $1.15b for week ended May 17, the third consecutive week of outflows.
• Yields have risen amid higher inflation expectations and hawkish commentary from Fed officials, while the outlook for economic growth has deteriorated across major developed markets, Barclay’s Brad Rogoff wrote in a note.
• This creates greater uncertainty about the June Fed decision, Rogoff wrote.
• Even as yields rose steadily and nervous investors stayed on the sidelines, the primary market saw a deluge of new issuance, with borrowers rushing to get ahead of any jumps in yields spurred by gridlock in the negotiations to raise the US debt ceiling.
• As US borrowers made a quick dash to the market, the week-to-date tally rose to $3.5b. The month-to-date supply jumped to more than $13b. The year-to-date volume stood at almost $71b.
• CCCs have bucked the overall trend as yields dropped on Thursday to 13.49% and has risen by just 6bps week-to-date versus a 35bps jump single B yields and 17bps in BBs.
• BBs posted losses for six days in a row and are on track to see the biggest weekly decline, with week-to-date losses of 0.54%, the biggest since March 10.

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.

(Bloomberg)  High Yield Market Highlights

• The junk market snapped the knee-jerk rally that followed the Fed meeting where Chair Jerome Powell said that the central bank was “much closer to the end” of the rate-hike campaign after raising interest rates by a quarter percentage point. US junk bonds posted the biggest one-day loss in seven weeks Thursday following drops in three of the last four sessions. After a frenzy of primary issuance, the asset class is headed for the biggest weekly decline since mid-March. Yields moved to a five-week high of 8.65% with spreads around +489 basis points.
• The high yield market had a lagged response to the collapse and takeover of First Republic Bank and plunging shares of PacWest Bancorp and Western Alliance Bancorp after rounds of trading halts.
• US junk bond borrowers rushed to sell bonds ahead of jobs data and any further volatility in the US regional banking industry rattling the financial stability. The primary market was inundated with new bond sales.
• The market sold more than $5b this week, making it the busiest since early April. The month- to-date supply of $5b surpassed May’s supply of $4b last year in just four sessions.
• The junk bond market losses extended across the rating spectrum on fresh concerns about financial stability.
• BB yields surged to cross the 7% level and close at 7.03%, a five-week high and the biggest one-day jump in seven weeks after rising steadily in three of the last four sessions. BBs also posted the biggest one-day loss since mid-March and is headed toward a weekly loss of 0.76%, the biggest since March 10.
• CCCs continue to be the best performing asset class in the high yield market, with a loss of 0.5% week-to-date versus 0.76% in BBs and 0.78% in single Bs.

(Bloomberg)  Fed Hikes Rates by Quarter Point, Powell Hints at Possible Pause

• The Federal Reserve raised interest rates by a quarter percentage point and hinted it may be the final move in the most aggressive tightening campaign since the 1980s as economic risks mount.
• “The committee will closely monitor incoming information and assess the implications for monetary policy,” the Federal Open Market Committee said in a statement Wednesday. It omitted a line from its previous statement in March that said the committee “anticipates that some additional policy firming may be appropriate.”
• Instead, the FOMC will take into account various factors “in determining the extent to which additional policy firming may be appropriate.”
• “That’s a meaningful change that we’re no longer saying that we anticipate” further increases, Chair Jerome Powell said at a press conference after the decision, when asked whether the statement is a signal that officials are prepared to pause rate increases in June. “So we’ll be driven by incoming data, meeting by meeting, and we’ll approach that question at the June meeting.”
• The increase lifted the Fed’s benchmark federal funds rate to a target range of 5% to 5.25%, the highest level since 2007, up from nearly zero early last year. The vote was unanimous, and Powell said support for the 25 basis-point rate increase was “very strong across the board.”
• Whether that rate will prove to be high enough to bring inflation back to the Fed’s 2% target will be an “ongoing assessment” based on incoming data, Powell said, adding later that Fed officials’ outlook for inflation does not support rate cuts.
• Powell said bank conditions had “broadly improved” since early March, but said the strains in the sector “appear to be resulting in even tighter credit conditions for households and businesses,” following a tightening in credit over the past year.
• “In turn, these tighter credit conditions are likely to weigh on economic activity, hiring and inflation,” he said. “The extent of these effects remains uncertain.”
• Powell said Wednesday it’s possible the US could experience what he hopes would be a mild recession, but “the case of avoiding a recession is in my view more likely than that of having a recession.” Wage increases have been moving down, and job openings have declined but have not been accompanied by rising unemployment, he said.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are posted to close the month with modest gains, outperforming investment-grade bonds, on expectations the Fed may pause its rate-hike campaign after an anticipated 25bps increase at the next policy meeting. The struggles of First Republic Bank this week reinforced that market consensus. The gains spanned the risk spectrum, propelled by CCCs, the riskiest of junk bonds, with a month-to-date return of 2%, the most since January’s 6.06%. CCCs rebounded from a loss of 1.37% in March.
• The April rally was also partly fueled by cash inflows into US high-yield funds. US junk bond funds reported a cash haul of almost $8b in April as investors returned to the asset class after pulling nearly $7b in March amid turmoil in the banking industry.
• CCCs were the best-performing assets in the US fixed- income market. Yields tumbled 32bps month-to-date to 13.12% while BB yields rose 6bps to 6.86%. The broader junk bond index yield rose 3bps for the month to 8.55%.
• The primary market was revived with a steady stream of borrowers ranging from bankers offloading debt sitting on their books to gaming and travel.
• The year-to-date supply is at $56.5b, up 4.4% year-over-year.

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.