Category: Insight

22 Nov 2024

CAM Investment Grade Weekly Insights

Credit spreads were largely unchanged during the week.  The Bloomberg US Corporate Bond Index closed at 78 on Thursday November 21 after closing the week prior at the same level.  The 10yr Treasury was also little changed during the period, closing at 4.44% last Friday and 4.42% this Thursday.  Through Thursday, the corporate bond index year-to-date total return was +2.50%.  The yield to maturity for the IG corporate bond index closed at 5.25% on Thursday.

 

 

Economics

It was an extremely light domestic economic calendar this past week with little of note.  Next week brings much more data to parse and Wednesday in particular is action packed with releases for GDP, personal consumption, consumer spending, durable goods and Core PCE.  This is the last time the Fed will get a look at its preferred inflation gauge prior to the FOMC rate decision on December 18.  As of Thursday evening, interest rate futures were pricing in a 56% chance of a 25bp cut at the December meeting.

Issuance

It was a brisk week for issuance as borrowers brought nearly $37bln of new debt to market.  Next week dealers are projecting $15-$20bln of issuance.  If that tally comes to fruition, then we would expect the bulk of that supply to occur on Monday before activity starts to slow as the calendar progresses toward the Thanksgiving holiday.

Flows

According to LSEG Lipper, for the week ended November 20, investment-grade bond funds reported a net inflow of +$4.6bln.  This was the largest weekly inflow since January of 2023.  Total year-to-date flows into investment grade funds were +$75.3bln.

 

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.

22 Nov 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

 

 

  • US junk bonds are set to cautiously rebound from last week’s losses after notching up gains for four sessions in a row. The market has reconciled to a slower pace of Federal Reserve interest rate cuts against the backdrop of steady growth and resilient labor market.
  • Junk bonds rebounded across ratings, led by CCCs, the riskiest part of the high yield market. CCC yields plunged to a new low of 9.82%, the lowest since April 2022 and falling 25 basis points in four days. The risk premium for CCCs tumbled to 523 basis points, a three-year low, as spreads tightened for four consecutive sessions.
  • CCCs are on track to be best performing asset class, with gains of 0.47% so far this week after rallying for four straight sessions.
  • Tightening spreads, attractive yields, steady growth against the backdrop of easing interest-rates kept the primary markets busy, with eight companies together selling $4b in new bonds. The November tally is nearly $9b
  • The broader index yields dropped six basis points this week so far to close at 7.23%. Spreads closed at 258 basis points, down eight basis points for the week
  • The post-Thanksgiving period tends to be positive for risk assets, with spreads tightening in ten of the past fourteen years, Barclays strategists Brad Rogoff and Dominique Toublan wrote Friday. They expect similar performance this year. But tight starting spreads, elevated complacency, and some soft spots in earnings could limit the upside, they warn
  • Though the momentum of the post-election rally faded, the slow but steady rebound this week on renewed expectations of less stringent regulations and lower taxes bolstered risk appetite, drawing high-risk pay-in-kind bonds in the primary market from RR Donnelley, commercial printing service provider.

 

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.

 

15 Nov 2024

CAM Investment Grade Weekly Insights

Credit spreads inched wider this week, just off their tightest levels of the year.  The Bloomberg US Corporate Bond Index closed at 77 on Thursday November 14 after closing the week prior at 74.  The 10yr Treasury moved from 4.30% last Friday to 4.43% through Thursday and it is a few basis points higher this Friday morning as investors continued to digest comments from Jerome Powell late Thursday afternoon that indicated that the Fed was in no hurry to raise its policy rate, casting some doubt on a cut at the December 17-18 meeting.  Through Thursday, the corporate bond index year-to-date total return was +2.41%.  The yield to maturity for the IG corporate bond index closed at 5.25% on Thursday.

 

 

Economics

This was the busiest week for economic releases in some time.  The bond market was closed on Monday and Tuesday was quiet but things started to pick up on Wednesday with a CPI print that came in line with economist forecasts resulting in a subdued market reaction.  On Thursday, PPI came in slightly higher than expected.  Friday brought a very solid retail sales print for the month of October with a sharp revision upward for the September, sparking a modest sell-off in the Treasury market.  As we discussed earlier in this note, Fed Chair Powell spoke in Dallas Thursday afternoon and he gave plenty of lip service to data dependency between now and the next FOMC rate decision on December 18.  This has cast some doubt on the prospect of a rate cut at the next meeting and futures were pricing in a 62.4% probability of a cut at the end of trading on Thursday.  This number had been as high as 82.5% just a day earlier.  Next week is extremely light on the economic front domestically but there are CPI data releases in the UK and Japan.  While foreign CPI is not particularly meaningful for our markets in a vacuum, they are instructive prints for the direction that those central banks may take with regard to their policy rates, which can impact the relative value of U.S. Treasuries in a global context.

Issuance

It was the busiest week for investment grade issuance in 2 months as borrowers priced almost $46bln of new debt.  The total for 2024 has now eclipsed $1.4 trillion, well ahead (+28%) of 2023’s pace.  Next week, syndicate desks are looking for $20-$25bln of new supply.

Flows

According to LSEG Lipper, for the week ended November 13, investment-grade bond funds reported a net outflow of -$0.444bln.  This outflow broke a streak of 15 consecutive weeks of inflows.  Total year-to-date flows into investment grade funds were +$70.7bln.

 

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.

15 Nov 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

 

 

  • The US junk bond market halted the post-election rally and recorded losses for three straight sessions as yields jumped nine basis this week to 7.21%. The market is on track to end a two-week rally, with the week-to-date loss at 0.16%.
  • The rally lost further momentum after Chair Jerome Powell suggested that the Federal Reserve is in “ no hurry to lower rates.” The US economic performance has been “remarkably good,” he said, signaling that the central bank had enough room to lower rates at a careful pace.
  • This came after data showed a measure of US inflation remained firm in October, highlighting the risks the central bank faces in bringing prices under control
  • Inflation data was followed by producer prices on Thursday. The US producer price index rose in October, signaling pressure in Fed’s favored gauge – the core PCE
  • The losses in the US junk bond market spanned across ratings. CCC yields climbed 12 basis points to 10% in three sessions this week, driving a loss of 0.02% on Thursday. CCCs are set to close the week flat
  • BB yields rose eight basis points 6.15% pushing a loss of 0.03% on Thursday. BBs are set to close the week with losses of 0.19%
  • Risk assets took a breather from the broad post-election rally this week, Brad Rogoff and Dominique Toublan wrote on Thursday. With few data points left and limited days for more supply, spreads can still grind tighter through year-end, despite being near 30-year lows, Rogoff and Toublan wrote
  • The losses in risk accelerated with Powell’s warnings coming after several Fed officials on Wednesday suggested that there was lack of clarity on the pace of easing and the appropriate level
  • “While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle,” Kansas City Fed President Jeff Schmid said in a speech at an energy conference co-hosted by the Kansas City and Dallas reserve banks
  • Uncertainty about the neutral rate has also risen, perhaps because the structural changes in the economy are “relatively recent and will take time to fully assess,” Dallas Fed President Lorie Logan said in separate remarks at the same conference
  • Junk bond yields and returns also came under pressure this week because US borrowers rushed to the market after a quick and clear election outcome
  • Eight borrowers sold more than $4b this week

 

(Bloomberg)  Powell Says It’s Smart to Go Slowly on Fed Easing If Data Allow

  • Federal Reserve Chair Jerome Powell said officials may slow the pace of interest-rate cuts as they approach the so-called neutral rate — a setting that neither slows nor stimulates growth.
  • The economy is doing very well and that is a great thing, Powell said Thursday during a Q&A session following a speech in Dallas.
  • “I think in this situation, what it calls for is us to be careful, move carefully, and as we sort of reach the range or get near the plausible range of neutral levels, it may be the case that we slow the pace of what we’re doing just to increase the chances that we get this right,” Powell said.
  • Powell said it would be smart to proceed slowly with lowering borrowing costs if the economic data allow.
  • US central bankers began lowering borrowing costs in September with an aggressive half-percentage-point cut, and then lowered the policy rate again by a quarter point last week. They’ve signaled a willingness to cut rates further so long as inflation continues to slow. Powell’s remarks appear in line with some of his other colleagues who are advocating a go-slow approach to future rate reductions.

 

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.

08 Nov 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

 

 

  • US junk bonds are headed for their second weekly gain after rallying for five straight sessions since Donald Trump won the presidency and Republicans regained control of the Senate. Yields tumbled to a three-week low and are on track for their second weekly decline. Spreads tighten for the fourth consecutive week and hover near a three-year low of 265 basis points.
  • The gains spanned all risk assets, with equities set for their best week in 2024. S&P 500 notched its 49th record this year sparking a rally across all assets and the VIX index is on track for the biggest weekly decline in three years. CCCs, the riskiest segment of the junk bond market, rose for five sessions in a row and are set to record their second weekly gain.
  • The broad rally rolled on uninterrupted after the Federal Reserve cut interest-rate by 25 basis points to 4.5%-4.75% as widely expected. The expectations are that the central bank will cut by 25 basis points in the December meeting
  • CCC spreads closed at 548 basis points, just 5 basis points above the 33-month low of 543. CCC yields fell below 10% again on Thursday to close at 9.94%, the lowest since April, 2022. Yields were down 10 basis points week-to-date
  • BB spreads are set for their fourth weekly drop after closing at 163. BBs are poised to end their two-week losing streak with gains of 0.4% so far
  • Single B spreads closed unchanged at 253 basis points, the lowest since the Great Financial Crisis, and yields fell nine basis points to 7.11% driving gains for five days in a row
  • We expect tighter spreads and compression in the short term, given structurally higher yields, Brad Rogoff and Dominique Toublan wrote this morning. The election’s swift results eased markets’ worst fears and have spurred a widespread risk-on sentiment, they added
  • The broad rally in risk assets is spurred by expectations that the Republican administration will be less aggressive with anti-trust laws and regulations. The market also expects lower taxes across the board
  • A clear outcome in the US presidential election ended uncertainty and volatility and reopened the primary market, though cautiously

 

(Bloomberg) Key Takeaways From Fed Decision to Cut Rate by Quarter Point

  • Federal Open Market Committee votes unanimously to lower benchmark rate by 25 basis points to target range of 4.5%-4.75%
  • Fed tweaks language to note “labor market conditions have generally eased,” and repeats “the unemployment rate has moved up but remains low”
  • Statement removes reference to “further” inflation progress, noting inflation “has made progress toward the committee’s 2% objective but remains somewhat elevated”
  • Statement removes language saying committee has “gained greater confidence” that inflation is moving sustainably toward 2% target
  • Statement maintains language saying risks to achieving employment and inflation goals “are roughly in balance”

 

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.

08 Nov 2024

CAM Investment Grade Weekly Insights

Credit spreads ripped tighter this week.  The Bloomberg US Corporate Bond Index closed at 75 on Thursday November 7 after closing the week prior at 83.  The index finished Thursday at its tightest level of 2024.  The 10yr moved from 4.38% last Friday to 4.33% through Thursday but that does not tell the whole story as the Treasury market was quite volatile this week on the back of Tuesday’s election with most benchmark rates trading in ranges of 20+ bps throughout the week.  Through Thursday, the corporate bond index year-to-date total return was +3.19%.

 

 

Economics

The election overshadowed what was a reasonably busy week for economic data but none of the prints missed expectations in either direction resulting in little market impact.  The FOMC rate decision on Thursday was in line as the central bank delivered a 25bp cut to its policy rate.  The Fed meets one more time this year on December 18 and interest rate futures were pricing a 71% chance of a 25bp cut at that meeting as of Thursday evening but there is plenty of data to parse over the next 5 weeks that could change investor opinions.  Important potential movers next week are CPI on Wednesday, PPI on Thursday and retail sales on Friday.

Issuance

It was a very slow week for issuance, as expected.  There was one $700mm deal priced on Monday and then nothing until Friday morning.  With two smaller deals pending on Friday the total issuance tally for the week will likely come in at ~$1.7bln once the dust settles.  Next week could see some increased activity if Treasury volatility subsides but the bond market is closed on Monday in observance of Veterans Day and there are still be many companies that are in earnings blackout.  These factors could result in a lighter new issue calendar.

Flows

According to LSEG Lipper, for the week ended November 6, investment-grade bond funds reported a net inflow of +$3.3bln.  This was the 15th consecutive week where the asset class reported an inflow.  Total year-to-date flows into investment grade funds were +$71.1bln.

 

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

01 Nov 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

 

 

  • US junk bond yields surged to a near-three-month high as the first month of the fourth quarter came to a close amid uncertainty over the path of the interest-rate policy after a string of better-than-expected economic data in October. Yields jumped 34 basis points in October, the most in six months, driving the worst monthly returns since April.
  • However, CCCs, the riskiest part of the junk bond market, rallied to rack up gains for the sixth month in a row, spurred by strong economic data. Yields tumbled 26 basis points to 10.10%, just three basis points above the 30-month low. CCCs are the best performing asset class in the US fixed-income market.
  • Spreads have been resilient despite volatility as higher yields fuel strong demand, Brad Rogoff and Dominique Toublan wrote this morning
  • While recent macro developments have been positive, upcoming catalysts such as the labor report, US elections, and the FOMC meeting may test a credit market, they wrote
  • BBs, the better-quality credit and most rate-sensitive within the high yield universe, were the worst performers in October, with a loss 0.92%. BB yields climbed to a more than three-month high of 6.24%, up 41 basis points for the month, the most since April
  • Rising yields were also partly due to a surge in supply in the junk bond market
  • Tight spreads and attractive yields pulled borrowers into the market in October taking the month’s supply to $24b. It was the busiest October since 2021
  • Out of the more than 25 borrowers in the market, two used proceeds to fund leveraged buyouts, one funded a dividend payment and two closed strategic acquisitions
  • CCCs accounted for about 19% of the total volume
  • One-third of the supply came from BBs

 

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.

01 Nov 2024

CAM Investment Grade Weekly Insights

Credit spreads moved slightly wider this week but remain just 5 basis points off YTD tights.  The Bloomberg US Corporate Bond Index closed at 84 on Thursday October 31 after closing the week prior at 82.  The 10yr moved from 4.24% last Friday to 4.28% through Thursday.  Through Thursday, the corporate bond index year-to-date total return was +2.77%.  The yield to maturity on the corporate index has been boosted in recent weeks by higher Treasury yields and it closed Thursday at a YTM of 5.16%.

 

 

Economics

It was a busy week for economic data.  The big takeaways were that the consumer is still spending and inflation is still sticky.  The payroll report on Friday was a big miss in terms of jobs added but this report was not viewed as all that meaningful due to noise from hurricanes and labor strikes.  All told, the data this week pushed Treasury yields slightly higher.  As we move ahead to next week all eyes will be on the election on Tuesday which will be immediately followed by a FOMC rate decision on Wednesday afternoon.  As we go to print, Fed Funds Futures are pricing in a 98.5% chance that the Fed delivers a 25bp cut.

Issuance

It was a solid week for issuance as IG-rated companies priced just over $27bln in new debt, capping the busiest October since 2021.  Next week is likely to see little to no issuance, though it is possible some companies could give the market a look on Monday.

Flows

According to LSEG Lipper, for the week ended October 30, investment-grade bond funds reported a net inflow of +$3.21bln.  This was the 14th consecutive week where the asset class reported an inflow.  Total year-to-date flows into investment grade funds were +$67.8bln.

 

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.

25 Oct 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • US junk bonds are headed for their biggest weekly loss in six months as yields surge alongside rise in Treasury yields and 9% loss in equities so far this week. Yields advanced in three of the last four sessions to close at 7.31%, up 15 basis points in four sessions.
  • Although the broad market recovered modestly on Thursday from the three-day losing streak, it’s on track to register losses across ratings. CCCs are set to post their first weekly loss in more than three months and the biggest since the week ended June 28.
  • The losses, while partly caused by expectations that the Federal Reserve will have a more measured approach on rate cuts, are also due to a sudden surge in new bond sales. Ten borrowers sold more than $6b this week, the second busiest week this month
  • Strong economic data, together with easing interest-rate policy, pulled borrowers into the market both for refinancing and funding acquisitions
  • Four more borrowers sold $3.5b on Thursday and two of the four funded leveraged buyouts
  • Month to date issuance is over $20b

 

(Bloomberg)  Treasuries Plunge Like It’s 1995 as Traders See Soft Landing

  • The last time US government bonds sold off this much as the Federal Reserve started cutting interest rates, Alan Greenspan was orchestrating a rare soft landing.
  • Two-year yields have climbed 34 basis points since the Fed reduced rates on Sept. 18 for the first time since 2020. Yields rose similarly in 1995, when the Fed — led by Greenspan — managed to cool the economy without causing a recession. In prior rate cutting cycles going back to 1989, two-year yields on average fell 15 basis points one month after the Fed started slashing rates.
  • Rising yields “reflect the reduced probability of recession risks,” said Steven Zeng, an interest rate strategist at Deutsche Bank AG. “Data has come in pretty strong. The Fed may slow the pace of rate cuts.”
  • The latest backup in yields shows how a resilient US economy and buoyant financial markets limit the options for Fed Chair Jerome Powell to aggressively lower rates. Interest swaps show traders are expecting the Fed to lower rates by 128 basis points through September 2025, compared with 195 basis points priced in about a month ago.
  • Global bonds have been sliding this week as investors weigh the potential of slower rate reductions.
  • The selloff extended slightly on Tuesday, pushing the 10-year yield up about one basis point after an increase of 11 basis points on Monday. The recent rise has brought the yield on the benchmark to around 4.2%, up from a 15-month low of 3.6% on Sept. 17 — one day before the Fed lowered borrowing costs by half a point.
  • On Tuesday, trading activities suggested that sentiment remains bearish, with a series of sales of block trades in 10-year note futures. In the options market, one trade targets the 10-year yields rising to about 4.75% by the option expiry on Nov. 22.
  • In 1995, the Fed slashed interest rates just three times — from 6% to 5.25% — in six months, after lifting them sharply. Yields on 10-year notes jumped more than 100 basis points 12 months later after the first cut that year, while two-year yields rose 90 basis points.
  • Currently, volatility has also picked up. The ICE BofA Move Index, which tracks expected swings in Treasuries in the coming month, has climbed to the highest level this 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.

25 Oct 2024

CAM Investment Grade Weekly Insights

Credit spreads moved wider this week after touching their snuggest levels of the year just 7 days ago.  The Bloomberg US Corporate Bond Index closed at 84 on Thursday October 24 after closing the week prior at 81.  The 10yr Treasury yield moved higher this week, cresting at a 3-month high on Wednesday. The 10yr moved from 4.08% last Friday to 4.21% through Thursday.  Through Thursday, the corporate bond index year-to-date total return was +3.14%.  The yield to maturity on the corporate index has inched back above 5% and closed Thursday at a YTM of 5.08%.

 

 

Economics

It was a benign week for economic data with little in the way of market moving prints.  Existing home sales didn’t improve in September even as mortgage rates came down which was somewhat of a surprise but with no discernible market impact.  S&P global PMI numbers were in line with expectations.  Next week brings some more meaningful releases with GDP as well as personal income/spending and the all-important Core PCE.  Looking ahead, the FOMC meets on November 7.  Recall that there is no Fed meeting in the month of October.

Issuance

It was an underwhelming week for issuance, which is not something that we have been able to write very frequently throughout 2024.  Companies priced just $12.1bln of high-grade bonds relative to the consensus estimate of $20bln.   Treasury yields have moved higher over the past few weeks making issuance slightly less attractive for borrowers.  We are also in the midst of corporate earnings meaning the window is closed for some companies.  We expect another relatively quiet week ahead with the election fast approaching.

Flows

According to LSEG Lipper, for the week ended October 23, investment-grade bond funds reported a net inflow of +$1.88bln.  This was the 13th consecutive week where the asset class reported an inflow.  Total year-to-date flows into investment grade funds were +$64.6bln.

 

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.