Insight – Page 2 – Cincinnati Asset Management

09 Apr 2025

High Yield Quarterly, Insight Rich Balestra - Portfolio Manager 0 comment

2025 Q1 High Yield Quarterly

Q1 COMMENTARY
April 2025

In the first quarter of 2025, the Bloomberg US Corporate High Yield Index (“Index”) return was 1.00%, and the S&P 500 index return was -4.28% (including dividends reinvested). Over the period, while the 10 year Treasury yield decreased 36 basis points, the Index option adjusted spread (“OAS”) widened 60 basis points moving from 287 basis points to 347 basis points.

With regard to ratings segments of the High Yield Market, BB rated securities widened 40 basis points, B rated securities widened 69 basis points, and CCC rated securities widened 118 basis points. The chart below from Bloomberg displays the spread move of the Index over the past five years. For reference, the average level over that time period was 384 basis points.

The sector and industry returns in this paragraph are all Index return numbers. The Index is mapped in a manner where the “sector” is broader with the more specific “industry” beneath it. For example, Energy is a “sector” and the “industries” within the Energy sector include independent energy, integrated energy, midstream, oil field services, and refining. The REITs, Banking, and Insurance sectors were the best performers during the quarter, posting returns of 2.77%, 2.12%, and 1.62%, respectively. On the other hand, Transportation, Technology, and Utilities were the worst performing sectors, posting returns of -1.43%, 0.36%, and 0.51%, respectively. At the industry level, healthcare REITs, wireless, and pharma all posted the best returns. The healthcare REITs industry posted the highest return of 5.57%. The lowest performing industries during the quarter were transport services, railroads, and refining. The transport services industry posted the lowest return of -3.09%.

The year started with fairly strong issuance. The $86.6 billion figure was one of the largest quarterly totals in the past four years. Of the issuance that did take place during Q1, Discretionary took 19% of the market share followed by Materials at 17% share and Financials at 16% share.

The Federal Reserve did hold the Target Rate steady at the January meeting and the March meeting. There was no meeting held in February. The current Fed easing cycle stands at 100 basis points in total cuts and kicked off in September of last year. The Fed dot plot shows an additional 50 basis points of cuts expected for the year. Market participants are forecasting a bit more aggressive Fed and are pricing in an implied rate move of 80 basis points in cuts for 2025. After the March meeting, Fed Chair Jerome Powell acknowledged that inflation is definitely on the radar. “Inflation has started to move up,” Powell said, “we think partly in response to tariffs. And there may be a delay in further progress over the course of this year.” While the Fed is currently choosing to hold rates steady, they have lowered their economic projections on growth. They believe that lower growth and higher inflation will balance out from a policy perspective. Going forward they will maintain their emphasis on hard data. “We do understand that sentiment has fallen off pretty sharply, but economic activity has not yet and so we are watching carefully,” Powell said. “I would tell people the economy seems to be healthy.”

Intermediate Treasuries decreased 36 basis points over the quarter, as the 10-year Treasury yield was at 4.57% on December 31st, and 4.21% at the end of the first quarter. The 5-year Treasury decreased 43 basis points over the quarter, moving from 4.38% on December 31st, to 3.95% at the end of the first quarter. Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the target rate. The revised fourth quarter GDP print was 2.4% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2025 around 1.9% with inflation expectations around 2.5%.

Being a more conservative asset manager, Cincinnati Asset Management does not buy CCC and lower rated securities. Additionally, our interest rate agnostic philosophy keeps us generally positioned in the five to ten year maturity timeframe. During Q1, our higher quality positioning served clients well as lower rated securities underperformed. Performance detractors included a cash drag given the positive Index performance, our credit selections within the consumer non-cyclicals sector and our underweight in the cable industry. Benefiting our performance this quarter were our credit selections in the consumer cyclical sector, utilities sector, and transportation sector. Another benefit was added due to our underweight in the packaging industry.

The Bloomberg US Corporate High Yield Index ended the first quarter with a yield of 7.73%. Treasury volatility, as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index), remains elevated from the 79 index average over the past 10 years. The current rate of 101 is well below the spike near 200 back during the March 2023 banking scare. The MOVE Index does show a general downward trend over the last two years. Data available through February shows 3 bond defaults this year which is relative to 16 defaults in all of 2022, 41 defaults in all of 2023, and 34 defaults in all of 2024. The trailing twelve month dollar-weighted bond default rate is 2.07%. The current default rate is relative to the 2.67%, 2.15%, 1.85%, 2.13% default rates from the previous four quarter end data points listed oldest to most recent. Defaults are generally stable and the fundamentals of high yield companies are in decent shape. From a technical view, fund flows were positive in the quarter at $5.2 billion. No doubt there are risks, but we are of the belief that for clients that have an investment horizon over a complete market cycle, high yield deserves to be considered as part of the portfolio allocation.

The high yield market hung onto gains for the quarter after a rough March. March had the worst monthly return for the Index in well over a year. The Fed referenced soft data is struggling a bit as consumer sentiment readings continue to fall and inflation expectations continue to rise. This no doubt impacted consumer spending which came in weaker than expected, and the market expected probability of recession is on the rise. Against this backdrop, corporate fundamentals are broadly in good shape, defaults are generally stable, and issuance remains robust. Meanwhile, the current administration continues to add tariffs to many countries and industries in an effort to rebalance US trading relationships. The Fed continues to evaluate and remains data dependent with a weight on hard data rather than sentiment or conjecture. Our exercise of discipline and credit selectivity is important as we continue to evaluate that the given compensation for the perceived level of risk remains appropriate. As always, we will continue our search for value and adjust positions as we uncover compelling situations. Finally, we are very grateful for the trust placed in our team to manage your capital.

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. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness. Additional disclosures on the material risks and potential benefits of investing in corporate bonds are available on our website: https://www.cambonds.com/disclosure-statements/.

i Bloomberg April 1, 2025: World Interest Rate Probability

ii Bloomberg March 19, 2025: Fed Holds Rates Steady

iii Bloomberg April 1, 2025: Economic Forecasts (ECFC)

iv Moody’s March 19, 2025: February 2025 Default Report and data file

v Bloomberg April 1, 2025: Fund Flows

09 Apr 2025

Insight, Investment Grade Quarterly Josh Adams - Portfolio Manager 0 comment

2025 Q1 Investment Grade Quarterly

First Quarter Recap & Outlook
April 2025

Investment grade credit performed relatively well in the first quarter, especially compared to equities and other riskier assets. Spreads were remarkably stable during the first two months of the year before volatility picked up during the month of March. Although spreads finished the quarter wider, this was more than offset by lower Treasury yields and coupon income.

First Quarter Review

During the first quarter, the option adjusted spread (OAS) on the Bloomberg US Corporate Bond Index widened by 14 basis points to 94 after it began 2025 at a spread of 80. Higher quality credit outperformed lower quality credit amid widening spreads. The longer duration portion of the index (>10yrs to maturity) outperformed the intermediate maturity segment by 11 basis points on the back of declining Treasury yields.

Treasury yields peaked in early January with the 10-year opening the year at 4.57% then climbing higher in the first two weeks of the period, briefly touching 4.79% before drifting steadily lower, closing the quarter at 4.21%. The 2yr, 5yr and 10yr Treasury yields finished 36, 43 and 36 basis points lower, respectively, which played a large role in driving positive returns for credit.

Coupon income was a key contributor to returns during the quarter, accounting for nearly half of the Corporate Index total return during the period (+1.15% of the +2.31% total return was due to coupon). This coupon benefit is directly correlated with the yields and newly minted coupons available to investors in the investment grade primary market. U.S. high grade sales posted the busiest first quarter on record as IG-rated firms printed more than $531bln of new debt, besting 2024’s haul of $529bln. The previous five-year average was $469bln. As we have written previously, we believe the primary market is in the midst of a goldilocks moment where investors and well capitalized companies are well obliged to lend and borrow.

The yield to maturity on the corporate index finished the quarter at 5.15% and is still meaningfully elevated compared to the compensation that was available for most of the past decade. This has not been a fleeting opportunity as the yield for the index has exceeded 5% for the majority of trading days since the 4th quarter of 2022 while the 10-year average for this metric was just 3.73%. We believe that this continues to be an attractive entry point for IG credit and elevated yields have increased the usefulness of investment grade as a diversification tool and it has also put the asset class in a position to potentially generate attractive total returns over the next several years. Higher yields mitigate downside risk among the wide range of potential outcomes stemming from government policy, the Federal Reserve and geopolitics.

Recession Odds Increasing

According to a Bloomberg survey of economists, the probability of a recession over the course of the next year rose during the first quarter. Throughout January and most of February this indicator was at 20% but then it rose steadily to 30% by the end of March. Some of this was due to softening economic data but a large contributor was uncertainty around U.S. trade policy and geopolitical issues.
Building on our point about the diversification benefits of IG credit, it has generally performed well during recessionary periods.

Using data from the National Bureau of Economic Research, we examined the more modern era of recessions that occurred in the 1980’s and beyond. Some of these time periods are very short and do not necessarily paint a full picture, but the results showed that IG credit has been a powerful implement in achieving diversification during times of economic stress.

U.S. Trade Policy

During the first quarter, the specter of tariffs clouded investors’ attempts to quantify the impact of looming tariffs on the U.S. economy and consumer spending. We believe that tariffs will have a limited impact on our portfolio, not only because of the companies we own but also due to the contractual nature of bonds and their position within the capital structure. If a company suffers a lapse in profitability due to tariffs, then it may need to adjust its financial policy as a result. There is no requirement or enforceable agreement for a company to pay dividends or repurchase shares. If financial performance is impacted enough then discretionary shareholder returns become levers that can be pulled to increase financial flexibility. There is no such optionality for a company when it comes to interest expense and debt obligations. If a company were to default on its debt obligations, then bondholders would take control of the assets of the company.
We examined intermediate bond and stock performance of the largest automakers in the world that are most exposed to the 25% tariff that went into effect on April 3. The performance time period was limited to just the first quarter of 2025, when trade policy was dominating the news cycle.

The bonds posted varying degrees of positive returns during the first quarter, while the performance of the equities was disparate. The point of this exercise was not to make the case for bonds over stocks but to indicate the potential price instability of more volatile asset classes wrought by the uncertainty of trade policy. Bottom line, by their very nature bonds have much less exposure to headline risk and manageable declines in earnings because bonds get paid first due to their priority in the capital structure. Tariffs are a headwind for profitability but is unlikely to impair an investment grade rated company from being able to adequately service its debt. The above comparison could potentially look a lot more favorable for equities if tariffs are reversed at some point in the future.

Federal Reserve

It was an uneventful quarter for the FOMC with meetings in January and March. The committee elected to hold its policy rate steady both times. The Fed released an updated dot plot in March with a few changes at the margin from December. The latest version of the plot showed that policymakers at the median continued to expect two rate cuts (50bps) in 2025. However, examining the details, there were more policymakers expecting zero or just one cut than there were in December. Investors were more dovish than the FOMC, and at quarter end, interest rate futures markets were pricing three cuts (75bps) by the end of 2025. We expect one or two cuts in 2025 as the most likely outcome but the state of the economy and the labor market will have much to say about the final outcome.
One theme we have been writing about over the course of the past few letters is the re-steepening of the 2/10 Treasury curve. We view this steepening as a product of investors reacting to the 100bps of cuts that the Fed delivered in the final months of 2024 as well as the anticipation of additional cuts in 2025 and beyond. As active managers we applaud a steeper Treasury curve because it creates a more opportunistic environment.

For those investors that have large allocations to short term investments and money markets, we recommend an evaluation of reinvestment risk. If the two-year Treasury were to continue to decline on the back of Fed cuts, then short term investments could earn substantially less than those further out the curve. Investors may consider reallocating some of that short duration capital to intermediate duration assets with greater return potential.

It’s a Marathon

The first quarter was a busy one –record primary volume, macroeconomic uncertainty and spread variability made for some long days. Given the price action in the first trading days of the second quarter it appears that volatility is here to stay. We will continue to lead with our focus on preservation of capital, carrying out our responsibilities with attention, care and a desire to please our clients. Credit selection and an ability to be nimble are paramount in order to successfully navigate what lies ahead.
Thank you for your continued interest. Please do not hesitate to contact us to discuss all topics relevant to credit.

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. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The Index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s portfolio. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. There is no assurance that any securities discussed herein have been held or will be held in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings, if any. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Upon request, Cincinnati Asset Management will furnish a list of all security recommendations made within the past year.

Additional disclosures on the material risks and potential benefits of investing in corporate bonds are available on our website: https://www.cambonds.com/disclosure-statements/

i Bloomberg First Word, March 28 2025, “US High-Grade Bond Sales Post Record 1Q; Slower Pace Next Week”

ii Bloomberg, March 31 2025, “United States Recession Probability Forecast”

iii National Bureau of Economic Research, March 31 2025, “Business Cycle Dating” The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months, considering factors like GDP, employment, income, sales, and industrial production.”

iv We selected fixed income securities for this exercise by screening for the most recently issued corporate bonds that were nearest 10yrs to maturity that could provide a full quarter of 1Q2025 performance; we also gave credence to Bloomberg liquidity scores selecting the most liquid bonds, all else being equal.

v The Federal Reserve, March 19 2025, “Summary of Economic Projections”

vi Bloomberg, March 31 2025, “World Interest Rate Probability (WIRP)”

04 Apr 2025

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads will finish this week much wider. The OAS on the corporate index closed at 102 on Thursday evening after ending the week prior at a spread of 93 and the IG credit market is generically 10bps wider as we go to print mid-morning on Friday. The 10yr Treasury yield rallied after Wednesday’s tariff announcement, moving from 4.25% at the end of last week to 4.03% at Thursday’s close. The benchmark rate is rallying again this Friday morning and is another 13bps lower at press time on the back of China’s retaliatory tariff response and weakness in global equity markets. IG credit is hanging in there for now and doing its job as a tool for diversification. Through Thursday, the Corporate Bond Index year-to-date total return was +2.82% while the yield to maturity for the Index closed the day at 5.06%.

Economics

The data this week took a back seat to global trade. The U.S. tariff announcements on Wednesday roiled global markets causing a rout in equities and wider credit spreads. U.S. Treasuries were a safe haven for investors and yields plunged. Friday’s employment report for the month of March was solid as payrolls posted a broad advance, easily besting the consensus number. The unemployment rate ticked higher from 4.1% in February to 4.2% for March. Markets paid little mind to the positive report with some investors dismissing it as backward-looking relative to the uncertainty regard trade. Traders are now trying to figure out how to navigate a global trade war as China announced retaliatory tariffs on Friday. It appears that there will not be a quick resolution on trade and that volatility is here to stay.

Looking ahead, all eyes will be on Fed chairman Jerome Powell who is slated to speak later this Friday morning. Major data releases next week include CPI and PPI, both in the latter half of the week.

Issuance

It was a very light week in the primary market which is no surprise considering the volatile backdrop. Just four firms sold $6bln of new debt relative to the $20bln estimate. The outlook for next week is murky and will be dependent on the market tone –dealers are estimating $10-$15bln of new supply.

Flows

According to LSEG Lipper, for the week ended March April 2, investment-grade bond funds reported their second net outflow of the year at -$353mm. This was the second consecutive week of modestly negative flows. Total year-to-date flows into investment grade funds are still soundly positive at +$19.31bln.

04 Apr 2025

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bond spreads widened to a 16-month high, the most since the pandemic in March 2020, as global markets were hit by US tariffs.
Yields surged to a nine-month high, hovering near 8%, after rising the most in more than two years.
Soaring yields and widening spreads triggered a 0.94% loss on Thursday, the biggest daily drop in more than two years
The primary market ground to a halt as risk wary investors fled to US Treasuries, with the 10-year Treasury yield falling below 4%. There was only one new debt sale in the past.
JPMorgan sweetened terms on a struggling bond offering for a high yield company that stalled last week amid heightened volatility caused by tariffs and plunging consumer confidence
If these tariffs are implemented fully, it would push the US and global economy into recession this year, JPMorgan’s credit strategists Eric Beinstein and Nathaniel Rosenbaum wrote this morning
Apollo’s chief economist Torsten Slok estimates that the effective tariff rate would be 22% and its impact on inflation will be +1.5% and GDP -1.5%
While the new tariffs are seen as the starting point for long, drawn-out negotiations, the trade conflict could escalate further in the near term, JPMorgan strategist Daniel Lamy wrote in note.
He warns of retaliation from some countries, which could spark additional measures from the US.
Lamy also noted that the US has threatened sectoral tariffs on pharmaceuticals, semiconductors, critical minerals and lumber

28 Mar 2025

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk bonds continued to retreat on renewed concerns prompted by tariffs on automakers that could provoke a large scale trade war, nullifying the impact of data showing US economy expanded faster-than-expected in the fourth quarter of last year.
The market stumbled for the second straight session on Thursday as yields surged six basis points to a two-week high of 7.63% and spreads widened eight basis points to 322. It is on track for a modest weekly loss of 0.19% after notching up declines in two of the last four sessions.
The impact of auto tariffs was immediate in the high-yield primary market as it triggered widepread worries that autopart maker Forvia may be forced to withdraw its debt offering. All outstanding auto bonds across the auto sector plummeted
While imposing a 25% tariff on automakers, the US also threatened harsher penalties on the EU and Canada should they unite against the US and impose reciprocal taxes, escalating market volatility and stamping down risk appetite
Amid pandemonium in the equity markets and all the noise around tariffs, the junk bond primary market continued to do business
US borrowers are rushing to sell debt amid concerns that growth could slow and dampen risk appetite sooner than later
Tuesday was the busiest since January in the primary market
The losses in the secondary market spanned across ratings. CCC yields rose to 10.57%, prompting a loss of 0.16% on Thursday
BB yields climbed to 6.39% and spreads rose above 200 basis points, pushing a loss of 0.17% on Thursday. BBs are also on track to post a modest loss this week
The losses were sparked by renewed worries about tariffs fueling inflation and forcing the Federal Reserve to keep rates higher for longer, disrupting growth and employment
Boston Fed President Susan Collins joined the chorus and said it looks “inevitable” that tariffs will boost inflation, at least in the near term, adding it’s likely appropriate to keep interest rates steady for longer.
Earlier in the week, Minneapolis Fed President Neel Kashkari said inflation is “above our 2% target” and so the central bank has a lot of work to do to lower that
And Alberto Musalem, President of Louis Fed, said it’s not clear any inflationary impact from tariffs will prove temporary, and he cautioned that secondary effects could prompt officials to hold interest rates steady for longer

(Bloomberg) US Consumer Spending Barely Rises, Key Inflation Gauge Picks Up

Consumer spending was weaker than expected again in February while a key inflation metric picked up, in a double whammy for the economy before the brunt of tariffs.
Inflation-adjusted consumer consumption edged up 0.1%, below all but one estimate from economists, after a slump January that analysts mostly blamed on bad weather. Notably in February, Americans reduced spending on services for the first time in three years in the face of higher prices — including on dining out.
“Consumers are resistant to price increases,” Neil Dutta, head of US economics at Renaissance Macro, said in a note. “Ultimately, inflation boils down to a household’s budget constraint and conditions are deteriorating here.”
The Federal Reserve’s preferred inflation rose 0.4% from January, the most in a year, according to Bureau of Economic Analysis data out Friday. The so-called core personal consumption expenditures price index, which excludes food and energy items, was up 2.8% from last year, remaining stubbornly above the Fed’s 2% target.
The report points to sticky inflation just as President Donald Trump’s planned tariffs risk stoking price pressures even further.
The Fed’s own forecasts underscore those fears, as policymakers signaled slower growth and faster inflation in fresh projections released at last week’s policy meeting. Chair Jerome Powell downplayed those concerns, even reviving the loaded word “transitory” to describe his expectations for tariff-driven inflation.
Officials are holding interest rates steady until they have a better sense of Trump’s policies — particularly tariffs, ahead of next week’s big rollout that the president has dubbed “Liberation Day.” While Trump imposed some levies on China last month, they didn’t seem to have much of an impact on price data, as consumer and producer prices both stepped down in February.
Much of the tariff impact to prices would come through goods. A measure of goods inflation that excludes food and energy climbed 0.4% for a second month in February, the biggest back-to-back advance since 2022. Core services prices — a closely watched category that excludes housing and energy — rose at a similar pace.
But spending on goods did bounce back in February on demand for durable goods like cars — perhaps a sign that some consumers are buying ahead of potential tariffs. Among services, a category that had been a consistent driver of spending growth in recent years, consumers reduced spending on veterinary services, as well as taxis and ridesharing.

28 Mar 2025

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads look set to finish slightly wider this week with the OAS on the corporate index closing at 91 on Thursday evening after ending the week prior at a spread of 90. The 10yr Treasury yield rose throughout the week and was 11 basis points higher during the period through Thursday but the benchmark rate is rallying amid a risk-off tone as we go to print this Friday afternoon and is currently only 3bps higher on the week. Through Thursday, the Corporate Bond Index year-to-date total return was +1.59% while the yield to maturity for the Index closed the day at 5.24%.

Economics

Investors continue to search for answers as the economic data this week did not do much to absolve the wall of worry that continues to weigh on risk assets.

Consumer confidence data continued its decline as the Expectations Index for the month of March fell to its lowest point in a dozen years. On the bright side, new home sales posted a modest gain for the month of February giving some hope that demand will impress during the spring selling season. Durable goods also came in better than expectations but it is hard to feel too good about this data with uncertainty surrounding trade policy and tariffs. On Thursday, Q42024 GDP came in stronger than estimates but accompanying trade data for February was ugly for Q12025 GDP. Finally on Friday we got some negative news with PCE (Fed’s preferred inflation gauge) and spending data. Inflation came in slightly hot relative to expectations and personal spending was woeful. Time will tell if this was a temporary blip or the beginning of a weakening trend for the consumer.

Next week the data is a little lighter and less meaningful in the first part of the week before we get the March unemployment report on Friday morning.

Issuance

The primary market exceeded expectations this week as more than $41bln of new debt was priced by a bevy of eager borrowers. Although there is one trading day left in the month that will likely have some new issuance, 2025 has already eclipsed 2024 as the busiest on record for a first quarter.

Next week is expected to be a lighter one with tariffs looming and syndicate desks are looking for just $20bln of new supply.

Flows

According to LSEG Lipper, for the week ended March 26, investment-grade bond funds reported their first net outflow of the year at -$406mm. Total year-to-date flows into investment grade funds were +$19.66bln.

21 Mar 2025

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads clawed their way back from the wides of last week and are poised to finish the period tighter. The OAS on the Corporate Index was 3 basis points tighter this week through Thursday. The 10yr Treasury yield inched lower throughout the week as investors remained wary of risk assets. The 10yr was 7bps lower through Thursday. Through Thursday, the Corporate Bond Index year-to-date total return was +2.49% while the yield to maturity for the Index closed the day at 5.13%.

Economics

The data this week yielded some mixed messages. Retail sales on Monday were soft as February sales advanced just +0.2% but the bigger news was a revision of January’s data that made it the largest monthly decline since 2021. There were some bright spots for the home construction market on Tuesday as housing starts showed a rebound for the month of February but permitting activity suggested a slowdown in future months. Staying with the housing theme for a moment, Thursday also had a positive release for existing home sales as they surprised to the upside for February, but affordability concerns remain a headwind. Wednesday’s FOMC release was unsurprising as the committee elected to hold rates steady. Commentary from Chairman Powell was viewed by investors as having a dovish tilt, and we agree, but the dot plot was slightly more hawkish than the prior release. The updated dot plot median expectations were unchanged with most members expecting 50ps worth of cuts by the end of 2025. However, examining the details, there were more policymakers expecting zero or just one cut than there were in December. Recall that the Summary of Policy Expectations (dot plot) is released every three months so we will not get our next update until the FOMC release on June 18.

There are now plenty of diverging views among investors and street economists with regard to the Fed’s policy rate. At Thursday’s close, interest rate futures were pricing 2.7 cuts by the end of 2025. There are some strategists predicting no cuts at all and then there are those in the recession/slow down camp that are predicting 3+ cuts. There were some calling for hikes but they seem to have gone into hiding for now. We view this Fed as being data dependent with a dovish bias and believe that 1 or 2 cuts before the end of 2025 as the most likely outcome.

Next week brings plenty to parse with new home sales, consumer confidence, durable goods, GDP, personal consumption, and finally on Friday we get the Fed’s preferred inflation gauge with the release of Core PCE.

Issuance

The new issue market for corporate bonds was in line with expectations this week as borrowers priced $33bln of new debt relative to the $35bln estimate. Concessions were narrower this week amid a more positive backdrop for credit than what we saw for most of the prior two weeks. YTD activity has been brisk thus far with $490bln of new issue, just -2% off 2024’s pace. Next week, syndicate desks are looking for around $30bln of new supply.

Flows

According to LSEG Lipper, for the week ended March 19, investment-grade bond funds reported a net inflow of +$336mm. Total year-to-date flows into investment grade funds were +$20.07bln.

14 Mar 2025

High Yield Weekly, Insight Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg) High Yield Market Highlights

US junk-bond yields surged to seven-month highs as risk premiums rose to levels not seen since August, driving the biggest one-day loss since December, amid the escalating trade war after Donald Trump threatened more tariffs on European exports.
The risk premium for junk bonds, as reflected in spreads, closed at 335 after widening 22 basis points on Thursday, the biggest move in seven months.
Credit spreads are not pricing in enough risk, Barclays strategists Brad Rogoff and Dominique Toublan wrote on Friday. Barclays revised its spread forecast for 2025 to 400-425 basis points versus its earlier forecast of 275-300 basis points
As junk bonds plunged, yields jumped the most in seven months to close at 7.67%.
Amid tumbling bond prices, rising yields and widening spreads, the primary market stalled on Thursday as US borrowers remained on the sidelines. Just $4b was priced this week compared with $8b last week
The losses in the junk-bond market extended across ratings. CCCs, the riskiest segment, suffered the worst losses since last summer.
CCC yields approached 11% on Thursday, rising 28 basis points. Yields were at a new six-month high
BB spreads closed at 213, also a seven-month high. Yields closed at 6.44%, a two-month high. BBs racked up a loss of 0.33% on Thursday, the biggest one-day loss this year

14 Mar 2025

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads moved meaningfully wider this week in sympathy with the rout in equities but the credit market has a more optimistic vibe as we go to print Friday morning. The OAS on the Corporate Index was 10 basis points wider on the week, closing at 97, its widest level of 2025 and the widest going back to early September 2024. It is worth noting that the move in credit spreads was extremely orderly relative to equities and the new issue market remained open. The 10yr Treasury was relatively stable during the week, especially compared to risk assets. The benchmark rate was 3bps higher on the week through Thursday. Through Thursday, the Corporate Bond Index year-to-date total return remained in positive territory at +1.73% while the yield to maturity for the Index closed the day at 5.22%.

Economics

Investors remained focused on the possibility of a slowing U.S. economy as they watched the data this week. Midweek headline CPI and PPI prints came in lower than expectations. These releases are not as meaningful to the FOMC as February PCE which will be released on March 28. Friday brought some gloomy data with the release of the U-Mich. Consumer sentiment data which showed that consumer long-term inflation expectations hit a 32-year high.

Next week’s focus will be on retail sales, housing starts and the FOMC meeting. Interest rate futures are pricing in a 99+% chance of no change in the Fed’s policy rate at the conclusion of that meeting on Wednesday. Looking ahead, traders expect ~2.7 cuts before year end with them likely occurring in June and September. To be clear, market sentiment and economic data can send those expectations in either direction at any given time.

Issuance

The new issue market remained active and healthy this week amid heightened volatility. Companies priced $35bln in new bonds which fell short of the $45bln estimate. Both Monday and Thursday saw some issuers stand down preferring to wait for quieter days to tap the market. Syndicate desks are looking for around $35bln of issuance next week and Monday is poised to be especially busy as rumor has it that more than a dozen companies will look to front-run the FOMC meeting if the tone is receptive. Issuers have historically avoided bringing new deals coincident with FOMC releases just to avoid any market surprises from the release itself or the ensuing press conference.

Flows

According to LSEG Lipper, for the week ended March 12, investment-grade bond funds reported a net inflow of +$942mm. Total year-to-date flows into investment grade funds were +$19.74bln.

07 Mar 2025

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads showed some stability this week which was impressive given the deluge of new issue supply. It looks as though the period will finish on a positive note based on price action this Friday morning. The OAS on the Corporate Index was unchanged at 87 basis points this week through Thursday. The 10yr Treasury yield rallied on Monday amid a risk-off sentiment before inching higher throughout the rest of the week. The benchmark rate was 7bps higher on the week through Thursday. Through Thursday, the Corporate Bond Index year-to-date total return was +2.10% while the yield to maturity for the Index closed the day at 5.15%.

Economics

Growth concerns were top of mind for market participants this week and Monday’s PMI report enforced some of those fears as the overall index came in lighter than expectations with a big jump in the Prices Paid component, likely due to the potential impact of tariffs. On the positive side, the ISM service index release showed an increase and it has now expanded in 54 of the past 57 months. Finally, Friday’s payroll report was slightly lower than expected in terms of jobs added during February and the unemployment rate ticked higher from 4.0% to 4.1% but both numbers were well within the margin of error and stocks actually staged a brief relief rally on the back of the release.

Next week has some economic prints of note. Things start to ramp up on Wednesday with a CPI release followed by PPI measures on Thursday. Looking further ahead, the FOMC will meet for the first time since the end of January on March 19.

Issuance

There were lofty expectations ($50bln) for issuance this week and they were exceeded in a big way. Mars Inc. led the way with a $26bln jumbo deal enroute to a $73bln week that saw dozens of companies tap the market. It was the busiest week for the primary market since the first week of September 2024 when $80bln printed. Syndicate desks are looking for more action next week with estimates calling for $45bln in new supply. Investors have plenty of cash to put to work and are still finding good value with most borrowers paying more than 5% to issue intermediate bonds. Looking at it from the standpoint of the borrowers, costs are elevated relative to the low-rate era but the cost of capital is still reasonable for large healthy companies when viewed through the lens of an overall capital allocation framework. This has served to create a win-win type of environment for both investors and borrowers. Year-to-date issuance has now surpassed $420bln which just slightly trails (-3% y/y) 2024’s pace.

Flows

According to LSEG Lipper, for the week ended March 5, investment-grade bond funds reported a net inflow of +$2.6bln. Total year-to-date flows into investment grade funds were +$18.8bln.

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