Category: Insight

16 Feb 2024

CAM Investment Grade Weekly Insights

Credit spreads are back at the tightest levels of the year.  The Bloomberg US Corporate Bond Index closed at 92 on Thursday February 15 after having closed the week prior at 95.  The 10yr is trading at 4.30% this Friday morning after closing last week at 4.18%. Through Thursday, the Investment Grade Corporate Index YTD total return was -1.63%.

Economics

There was a boatload of data this week and it resulted in volatility in equities and Treasuries. The three major highlights are as follows: first, CPI came in hotter than expected on Tuesday morning which sent rates higher and stocks lower. Thursday morning was for the doves as retail sales data came in much weaker than expected –this sent rates lower.  Finally on Friday morning, a data release showed that the producer price index rose more than expected.  The PPI release sent rates to their highest levels of the week and stocks had a modestly negative reaction.  At the end of the this note we have attached a weekly price graph of the 2-year Treasury as well as the Dow Jones Industrial average to illustrate some of the volatility that occurred in those markets during the week.  As far as investment grade credit was concerned, the asset class fared well during the week as spreads shot tighter but there is a cautious tone in the market amid higher Treasury yields as we go to print this Friday morning.  Next week is a holiday shortened week that is light on economic data.  We are of the mind that the price action this week was ultimately helpful as we felt that there was far too much consensus from market participants on imminent rate cuts at the March meeting.  The economic data has served to all but squash the prospect of a cut at the March 20 meeting and now we are seeing much more reasonable estimates from market prognosticators that the first rate cut may be delayed until the May, June or July meetings.  We still don’t think it is a lock that the Fed cuts rates at all this year and we cannot discount entirely the possibility that inflation data remains sticky, pushing the first cut into 2025 and thus increasing the odds of a landing that isn’t necessarily hard but certainly isn’t soft.

Issuance

It was another active week for issuance as borrowers priced more than $37bln in new debt.  Bristol Myers led the way as it printed $13bln across 9 tranches to fund its acquisitions of Karuna Therapeutics and Rayzebio.  Next week is expected to be especially busy even despite the fact that the market is closed on Monday.  Estimates are calling for as much as $45bln in new debt when the market reconvenes after Presidents Day.

Flows

According to LSEG Lipper, for the week ended February 14, investment-grade bond funds reported a net inflow of +$2.28bln.  This was the ninth consecutive weekly inflow for IG funds.

U.S. 2 Year Treasury Last 5 Days:

Dow Jones Industrial Average Last 5 Days:

 

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.

09 Feb 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • After a bumpy start to the year, US junk bonds are headed for their third straight week of gains, propelled by CCCs, the riskiest tier of the high yield market.
  • Gains spanned across the market, spurred by economic growth backed by strong labor market, expanding business activity and cooling inflation data, brushing off Federal Reserve officials’ chorus reiterating that the central bank is not in a hurry to ease monetary policy.
  • Risk assets were mostly higher this week, along with yields, as earnings results remained largely positive, Barclays’ Brad Rogoff and Dominique Toublan wrote on Friday
  • With macro data still benign, spreads should continue to react to yield moves as the incremental buyer is yield-focused, they wrote
  • CCC yields fell 11 basis points week-to-date to 12.45%, the biggest weekly decline within the high yield market. CCCs are on track to be the best performing asset in the US junk bond market, with week-to-date gains of 0.32%
  • The rally gained legs as fears of a recession receded in the backdrop of continuing strength in the labor market as US unemployment claims fell for the first time in three weeks
  • The broader US high yield index yield rose by three basis points to 7.79%. The rally in CCCs drove the modest gains in broader index
  • As spreads dropped to a six-week low of 321 basis points and yields hovered near 8%, US borrowers continued to crowd the primary market. Borrowers were in a hurry to capitalize on the still-low cost of debt, yet high enough to attract buyers, before the economy begins to show some expected signs of slowing in the second half
  • After a busy January, with the month-to-date supply at $8.55b, February is on track to be the busiest since 2021

 

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.

26 Jan 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • US junk bond supply so far this month is 13% above that for all of January 2023, helped by $3.5b of sales Thursday that was the busiest session in three months.
  • The market is on track to have its heaviest overall month in more than two years, with new borrowers led by sponsor-owned companies rushing to refinance debt and extend maturities. Yields have held firmly below 8% and spreads remain below 350 basis points.
  • At least four borrowers are expected to sell about $4b in the coming days
  • Economic data continue to bolster sentiment, the latest being GDP growth trouncing forecasts amid a jump in personal spending
  • Resilient growth, strong business investment and new home sales have spurned recession calls and bolstered risk assets
  • Junk bonds are headed for weekly gains, with yields down 9bps to 7.80% and spreads narrowing 4bps to 334bps
  • Strength has been across ratings
  • BB yields have dropped back below 6.5% and spreads hover near 200bps, with the segment returning 0.4% so far this week
  • CCCs have climbed for six consecutive sessions, generating combined gains of 0.5% since Monday

 

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.

26 Jan 2024

CAM Investment Grade Weekly Insights

Credit spreads are once again trading at the tightest levels of the year as we go to print.  The Bloomberg US Corporate Bond Index closed at 93 on Thursday January 25 after having closed the week prior at 95.  The 10yr is trading at 4.16% this Friday morning after closing last week at 4.12% –the 10yr yield is 24bps higher than where it began 2024.  Through Thursday, the Corporate Index YTD total return was -0.99%.

Economics

It was a robust week of data and central bank meetings, although none of the releases resulted in large market swings.  The Bank of Canada held its key rate at 5% on Wednesday while the ECB held its deposit rate at 4% for the third consecutive meeting on Thursday.  In the U.S. the most anticipated release was Friday morning when the Federal Reserve’s preferred inflation measure hit the tape. PCE rose 0.2% in December from the previous month after posting a 0.1% decline in November.  It showed that prices were up 2.6% on the year, which is much lower than the reading at the end of 2022.  Bottom line, the data is showing significant progress in the war against inflation.  Next week, all eyes are on the FOMC which releases its first rate decision of the year on Wednesday.  Market prognosticators are looking for the Fed to hold steady but it is the commentary around the timing of easing that could impact global markets.

Issuance

Issuance this week was not paltry but it was underwhelming compared to the consensus estimate as companies priced $18.55bln in new debt relative to expectations of $25bln.  There is one deal pending on Friday morning with its size to-be-determined which will add to the monthly total through Thursday of $167.8bln.  Recall that the all-time record for the month of January was $175bln which was set in 2017.  This record is well within striking distance as preliminary estimates for issuance next week are $20-$25bln.

Flows

According to Refinitiv Lipper, for the week ended January 24, investment-grade bond funds reported a net inflow of +$1.24bln.  This was the sixth consecutive weekly inflow for IG funds.

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.

24 Jan 2024

2023 Q4 High Yield Quarterly

In the fourth quarter of 2023, the Bloomberg US Corporate High Yield Index (“Index”) return was 7.16% bringing the year to date (“YTD”) return to 13.44%.  The S&P 500 index return was 11.68% (including dividends reinvested) bringing the YTD return to 26.26%.  Over the period, while the 10 year Treasury yield decreased 69 basis points, the Index option adjusted spread (“OAS”) tightened 71 basis points moving from 394 basis points to 323 basis points.

All ratings segments of the High Yield Market participated in the spread tightening as BB rated securities tightened 63 basis points, B rated securities tightened 89 basis points, and CCC rated securities tightened 72 basis points.  The chart below from Bloomberg displays the spread moves in the Index over the past five years.  For reference, the average level over that time period was 413 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 Brokerage, Banking, and Finance sectors were the best performers during the quarter, posting returns of 11.80%, 9.37%, and 8.40%, respectively.  On the other hand, Transportation, Energy, and Other Industrial were the worst performing sectors, posting returns of 4.25%, 5.24%, and 6.53%, respectively.  At the industry level, retailers, media, and building materials all posted the best returns.  The retailers industry posted the highest return of 10.03%.  The lowest performing industries during the quarter were oil field services, airlines, and independent energy.  The oil field services industry posted the lowest return of 3.10%.

While there was a dearth of issuance during 2022 as interest rates rapidly increased and capital structures were previously refinanced, the primary market perked up a bit during each quarter this year.  Issuance has remained low by historical standards as so much was pushed out by the large issuance during 2020 and 2021.  For 2024, strategists are looking for issuance in the range of $200-$230 billion.  Of the issuance that did take place during Q4, Finance took 29% of the market share followed by Energy at 28% share and Industrials at 13% share.

The Federal Reserve did hold the Target Rate steady at the November and December meetings.  There was no meeting held in October.  This made three consecutive meetings without a hike.  The last hike was back in July.  For the first time since March of 2021, the Fed is not projecting additional hikes.  In fact, the Fed dot plot shows that Fed officials are forecasting 75 basis points in cuts during 2024.  It sure seems like the worm has finally turned and the market is responding positively.  During the December post meeting press conference, Chair Powell did pay lip service to the ability to hike again if needed, but the focus moved to rate cuts.  With regard to when it will become appropriate to cut rates, Powell said “That begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today.”i  The Fed’s main objective has been lowering inflation and it continues to trend in the desired direction.  The most recent report for Core CPI showed a year over year growth rate of 4.0% down from a peak of 6.6% over one year ago.  Further, the most recent Core PCE growth rate measured 3.2% off the peak of 5.6% from February of 2022.

Intermediate Treasuries decreased 69 basis points over the quarter, as the 10-year Treasury yield was at 4.57% on September 30th, and 3.88% at the end of the fourth quarter.  The 5-year Treasury decreased 76 basis points over the quarter, moving from 4.61% on September 30th, to 3.85% at the end of the fourth 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 third quarter GDP print was 4.9% (quarter over quarter annualized rate).  Looking forward, the current consensus view of economists suggests a GDP for 2024 around 1.3% with inflation expectations around 2.6%.ii

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 Q4, Index performance was very strong leading to our cash position being a drag on performance.  Additional performance drag was due to our credit selections within banking and brokerage as we positioned in high quality credits in those sectors.  Benefiting our performance this quarter were our credit selections in capital goods, technology, and electric utilities.

The Bloomberg US Corporate High Yield Index ended the fourth quarter with a yield of 7.59%.  Treasury volatility, as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index), has picked up quite a bit the past couple of years.  The MOVE averaged 121 during 2023 relative to a 62 average over 2021.  However, the current rate of 114 is well below the spike near 200 back in March during the banking scare.  Data available through November shows 39 defaults during 2023 which is up from 16 defaults during all of 2022.  The trailing twelve month dollar-weighted default rate is 2.46%.iii  The current default rate is relative to the 1.14%, 1.30%, 1.74%, 1.93% default rates from the previous four quarter end data points listed oldest to most recent.  While defaults are ticking up, the fundamentals of high yield companies still look good.  From a technical view, fund flows were positive in the quarter at $6.7 billion and total -$22.6 billion YTD.iv  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.

What a difference several months can make.  Not too long ago 10 year rates were at 15 year highs topping out close to 5%.  Today the 10 year rate is just under 4%.  Crude oil was over $90 per barrel and now it is a touch over $70 per barrel.  As we move forward in 2024, the labor market is holding up but cooling as job seekers are beginning to struggle to find work.  Consumer delinquencies have been ticking up across most loan categories while savings have dwindled and the savings rate remains below average.v  No doubt that this softness is being taken into account by market participants.  That is the reason for the lower GDP projections and the Fed talking potential cuts at this point in time.  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 December 13, 2023:  Fed Pivots to Rate Cuts

ii Bloomberg January 2, 2024: Economic Forecasts (ECFC)

iii Moody’s December 14, 2023:  November 2023 Default Report and data file

iv CreditSights December 21, 2023:  “Credit Flows”

v Moody’s December 2023:  State of the US Consumer

24 Jan 2024

2023 Q4 Investment Grade Quarterly

Click here to read the Spanish version / Haga clic aquí para leer la versión en español

Investment grade credit bounced back in 2023.  The year was a powerful demonstration of spread compression and the benefit of the carry associated with higher interest rates.  For the full year 2023, the option adjust spread (OAS) on the Bloomberg US Corporate Bond Index tightened by 31 basis points to 99 after it opened the year at 130.  Interest rates were volatile during 2023 but Treasury yields at the end of the period finished very close to where they started.  The 10yr Treasury ended 2023 at 3.88% which is exactly where it closed in 2022.  The 2yr and 5yr Treasuries finished 2023 18 and 15 basis points lower from where they started, respectively.

2023 Year in Review

It was a solid year of positive performance for investment grade credit, but there were some bumps along the way.  The Corporate Index was in positive territory for all but 2 trading days during the first nine months of 2023 until higher interest rates took a bite out of returns in the first three weeks of October.  On October 19, the year-to-date total return for the index was at its low for the year, down to -2.53%, which also happens to be the day that the 10 year Treasury closed at 4.99%, its highest level of the current cycle and its highest yield since July of 2007.

From that point in October it was a one-two punch of tighter spreads and lower interest rates which led to higher returns through year end.  The OAS on the index moved from 129 on October 19 to 99 at year end while the 10 year Treasury moved lower from 4.99% to 3.88% over the same time period.  As a result of spread compression and lower interest rates, the Corporate Index posted a +11.33% total return from October 19 through the end of 2023.  What was the catalyst for such a dramatic turnaround in performance in such a short period of time?  We think there are several reasons that investors turned positive on IG credit: cooling inflation, a resilient job market and strong economic growth to name a few.  However, the biggest driver of higher returns, in our view, was the likelihood that the Federal Reserve had reached the end of its current hiking cycle.  The Fed elected to pause at its September, November and December meetings and its messaging at its most recent meeting suggested that it would not hike again.  We have argued throughout the hiking cycle that corporate credit could perform well when it became increasingly clear that the Fed was done raising its policy rate, but the depth and velocity of the 4th quarter rally exceeded our expectations.

As far as spread performance was concerned, 2023 saw tighter spreads across the board.  More than half (4.55%) of the index total return for 2023 (8.52%) was attributable to tighter credit spreads.  Lower quality IG-rated credit led the way, especially as credit spreads compressed in the final two months of the year.  The best performing industries in 2023 were Media & Entertainment and Oil Field Services.  While performance for the laggards was positive, Construction Machinery and Consumer Products were the two largest underperforming industries relative to the Corporate Index.  There were no industries within the investment grade universe that came anywhere close to posting a negative annual total return.

2024 Outlook

We have a positive stance on the investment grade credit market for the year ahead.  The yield of the asset class continues to trade at much higher levels relative to recent history.  The average yield on the Index over the past 10 years was 3.45% and it finished 2023 at 5.06%.  It is not as attractive today as it was during the October rate selloff when the index closed with a yield above 6.4% but the compensation afforded is still meaningfully higher than in the recent past.

Our positive view of the market as described above refers to the “all-in” compensation for IG which is comprised of the underlying Treasury as well as additional compensation that an investor receives for owning a bond in the form of credit spread.  Speaking specifically to the valuation of credit spreads, we are not as positive on spreads as we are on yields given current trading levels and we feel that spreads finished the year near the tighter end of fair value.  Looking at the past 20 years of data, the average spread on the index was 149, although this time period includes the GFC when the spread on the index blew out to >600.  The low was 75 in March of 2005 and the low for the current credit cycle was 80 in 2021.  The spread on the index closed the year at 99 and it is certainly capable of trading sideways at this level for a long period of time and it can even grind tighter from here.  But we want to be realistic with our investors about the upside potential in credit spreads.  We believe that credit spreads are pricing in a relatively high likelihood of a soft landing and any data to the contrary (read: recession) will lead to wider spreads.  The good news is that when you are starting with a >5% yield, there is a comfortable margin of safety available for spread widening while still generating positive total returns.  We would also point out that most recessions are accompanied by a move lower in Treasury yields which could serve to offset wider credit spreads.

We have a favorable view of the general health of the credit market and we believe that strong credit metrics are compelling from the standpoint of risk reward.  Although peak credit metrics of the current cycle occurred at the end of 2021, the creditworthiness of the IG credit market as a whole is stable and even showing improvement by some measures.i  According to research compiled by Barclays, at the end of the third quarter 2023, net leverage for the index was 2.8x, EBITDA margins were 29.6% and interest coverage was 12.7x.1  While leverage and interest coverage were not quite as good as they have been in recent years, they were both at very reasonable levels, showing recent improvement while EBITDA margins have been remarkably stable and were only 0.4% from all-time highs.  With few exceptions, investment grade rated companies are in very good shape.

Portfolio Positioning

We focus on the management of credit risk through a bottom up research process; so although we have a macro-view, we spend most of our time thinking about how that broader view may impact individual holdings within client portfolios.  As a reminder, we structure each separately managed account in the following manner.

  • Diversification: Each individual client or institutional portfolio is initially populated with approximately 20-25 positions. We diversify portfolios by seeking to limit each account to a 20% exposure at the sector level and 15% at the individual industry level, with the exception of the Financial Institutions (Finance) sector.  For Finance we limit each account to a 30% exposure because it represents a large portion of the IG index with a 32.97% index weighting at the end of 2023.
  • Credit Quality: One of the biggest differentiators between CAM’s portfolio and the Index is our bias toward higher quality credit in that we look to cap each client account at a 30% exposure to BAA-rated bonds. The Index had a 47.14% weighting in BAA-rated credit at the end of 2023 and this figure for the Index has been >50% several times in recent years –this leaves CAM’s portfolio with meaningfully less exposure to lower rated credit relative to the Index.
  • Maturity: We will always seek to position the portfolio within an intermediate maturity band that ranges from 5-10 years. Occasionally you will find that we will hold some shorter maturities that mature in less than 5 years. This is especially true during the current environment where certain portions of the Treasury curve are inverted –we want to be patient and allow more time for our sale and extension trades to become economic.  We will also occasionally purchase a bond that matures in >10 years but this is not typical and any such purchase will not be materially longer than 10 years. During the invest-up phase we will typically populate new portfolios with maturities that range in tenor from 8-10 years.  As an account becomes seasoned we will look to sell bonds at ~5 years left to maturity and then we will redeploy those sale proceeds back into ~10 year maturities.  As a result of our intermediate positioning, at year end 2023 our composite had a modified duration of 5.4 relative to the Index duration of 7.3.

The mission of our Investment Grade Strategy is to provide our clients with superior risk adjusted returns.  Our goal is to minimize volatility by incurring less credit risk and less interest rate risk than the Index.

Fed Watching

In his prepared remarks following the December FOMC meeting, Chair Powell said that “…our policy rate is likely at or near its peak for this tightening cycle.”ii  While he did not specifically rule out additional rate increases it has become increasingly clear that the Fed is unlikely to hike again.  Now all attention has turned to the Fed rate-cut narrative which is sure to dominate the business news cycle in 2024.  The most recent version of the Fed “dot plot” that was released at its December meeting showed that central bankers expect 0.75% of rate cuts in 2024.  One way to look at this is if the Fed moves in 25bps increments then it is expecting to cut rates three times during the year.  It is worth noting that the dot plot is simply the best estimate at a given point in time and it does not necessarily mean that the consensus estimate will come to fruition.  For example, the dot plot that was released at the September 2023 meeting showed that there would be one additional 25bp rate increase in 2023 but that did not occur.

The Fed made a splash at its December meeting with its dovish commentary.  One measure we track to gauge market perception is The Goldman Sachs Financial Conditions Index which is a weighted average of short and long-term interest rates, the value of the $USD, credit spreads and the ratio of equity prices to the 10-year average of EPS.

As you can see from the above chart, conditions were tightening rapidly in September and October before they just as quickly started to ease beginning with the November 1 FOMC meeting and then again at the December 13 meeting (denoted by the vertical line on the chart).  We do not think it was necessarily a policy mistake but believe that the December press conference was a missed opportunity for Chairman Powell to push back against easing financial conditions, which ended 2023 near the most comfortable levels of the year.  The U.S. economy added 4.8mm jobs in 2022 and another 2.7mm jobs in 2023.iii  We believe that the bar for near term rate cuts is quite high unless the economy experiences a proportional slowing of job growth in 2024.

This brings us to our final thought with regard to Fed policy.  The target range for Fed Funds was 5.25%-5.5% at year end and the Effective Fed Funds rate per data compiled by the New York Fed was 5.33% at the end of 2023.  A 75bp move on an effective rate of 5.33% is a percentage decrease of 14%.  We question whether the prospect of a move of just 14% is really enough to sustain the exuberance that risk assets experienced in the final two months of 2023.  We think that, regardless of what it says, this Fed is determined to avoid repeating the mistakes of the past and that it must have the utmost confidence that inflation will settle at its 2% target before it starts to really move the needle with rate cuts.  The best way for the Fed to accomplish this is to keep its policy rate “higher for longer.”  An extended period of elevated rates is not necessarily a bad thing for bonds nor is it bad for IG-rated companies with good balance sheets but it could present a headwind for equities and certain sectors of the economy such as commercial real estate.  Ultimately we believe “higher for longer” diminishes the prospect of a soft landing and increases the probability that the economy will enter a recession near the end of 2024 or sometime in 2025.  The timing of such a call is always the most difficult part.

Moving Forward

Thank you for your continued enthusiasm and support and for trusting us to manage your hard earned capital.  We look forward to collaborating with you in 2024.

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. 

 

The information provided in this report should not be considered a recommendation to purchase or sell any particular security.  There is no assurance that any securities discussed herein will remain 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.  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.


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 Barclays Bank PLC, December 11 2023 “US Investment Grade Credit Metrics, Q3 23 Update: Stable”

ii Federal Reserve System Board of Governors Chairman Jerome H. Powell News Conference, December 13 2023 “Federal Reserve System”

iii The Wall Street Journal, January 5 2024 “Job Gains Picked Up in December Capping Year of Healthy Hiring”

20 Jan 2024

COMENTARIO DEL CUARTO TRIMESTRE

El crédito con grado de inversión se recuperó en 2023.  El ejercicio fue una fuerte demostración de la reducción de los diferenciales y del beneficio residual asociado con altas tasas de interés.  Para todo el año 2023, el diferencial ajustado por opciones (OAS) en el índice de bonos corporativos de EE. UU. de Bloomberg se redujo en 31 puntos básicos a 99 después de haber abierto el año en 130.  Las tasas de interés fueron volátiles durante 2023, pero el rendimiento de los bonos del Tesoro al final del período terminó muy cerca de donde comenzó.  Los bonos del Tesoro a 10 años terminaron 2023 en 3,88 %, que es el mismo número con el que cerraron en 2022.  Los bonos del Tesoro a 2 y 5 años terminaron 2023 con una disminución de 18 y 15 puntos básicos, respectivamente, respecto de donde empezaron.

Año 2023 en revisión

Se trató de un año sólido con rendimiento positivo para el crédito con grado de inversión, aunque hubo algunos obstáculos en el camino.  El índice corporativo se mantuvo en territorio positivo durante todas las jornadas bursátiles de los primeros nueve meses de 2023, salvo por dos días, hasta que las tasas de interés más altas afectaron la rentabilidad en las tres primeras semanas de octubre.  El 19 de octubre, la rentabilidad total del último año para este índice estuvo en su punto más bajo, con una disminución de -2,53 %, lo que coincidió con el día en que el bono del Tesoro a 10 años cerró en 4,99 %, su nivel más alto del ciclo actual y su rendimiento más alto desde julio de 2007.

Desde ese punto en octubre se produjo un doble impacto de diferenciales más ajustados y tasas de interés más bajas, lo que se tradujo en rentabilidades más altas hacia fin de año.  El OAS del índice bajó de 129, el 19 de octubre, a 99, a fin de año, mientras que el bono del Tesoro a 10 años descendió de 4,99 % a 3,88 % durante el mismo período.  Como resultado de la reducción de los diferenciales y la disminución de las tasas de interés, el Índice corporativo registró una rentabilidad total de +11,33 % entre el 19 de octubre y finales del año 2023.  ¿Cuál fue el catalizador de un cambio de rumbo tan drástico en el rendimiento en tan poco tiempo?  Creemos que existen varias razones para que los inversores volvieran positivo el crédito con grado de inversión: una inflación controlada, un mercado de empleo resiliente y un crecimiento económico sólido, por nombrar algunas.  Sin embargo, en nuestra opinión, el mayor impulsor del aumento del rendimiento fue la probabilidad de que la Reserva Federal hubiera llegado al final de su actual ciclo de subidas.  La Reserva Federal optó por hacer una pausa en sus reuniones de septiembre, noviembre y diciembre, y en su comunicado de la reunión más reciente, se sugirió que no habría más subidas.  A lo largo del ciclo de subidas, hemos argumentado que el crédito corporativo podría tener un buen desempeño cuando quedara más claro que la Reserva Federal había concluido con su política de suba de tasas, pero la profundidad y velocidad del repunte del cuarto trimestre superó nuestras expectativas.

En lo que respecta al rendimiento del diferencial, 2023 fue testigo de diferenciales más ajustados en todos los ámbitos.  Más de la mitad (4,55 %) de la rentabilidad total del índice para 2023 (8,52 %) se pudo atribuir a diferenciales de crédito más ajustados.  El crédito con calificación de grado de inversión (IG) de menor calidad lideró el camino, especialmente a medida que se redujeron los diferenciales de crédito durante los últimos dos meses del año.  Las industrias con un mejor rendimiento en 2023 fueron la de Medios y Entretenimiento y Servicios de Yacimientos Petrolíferos.  Si bien el rendimiento para los rezagados fue positivo, Maquinaria de Construcción y Productos de Consumo fueron las dos industrias más rezagadas en relación con el índice corporativo.  No hubo ninguna industria del universo con grado de inversión que se acercara lo más mínimo a un registro de rentabilidad total anual negativa.

Perspectiva para el 2024

Tenemos una postura positiva sobre el mercado de crédito con grado de inversión para el año entrante.  El rendimiento de esta clase de activos continúa cotizando a niveles mucho más elevados en relación con la historia reciente.  El rendimiento promedio del Índice durante los últimos 10 años fue de 3,45 % y finalizó a 5,06 % en 2023.  No es atractivo hoy en día como lo era durante la liquidación de tasas de octubre cuando el índice cerró con un rendimiento superior a 6,4 %, pero la compensación ofrecida sigue siendo significativamente más alta que en el pasado reciente.

Nuestra visión positiva del mercado, según lo descrito anteriormente, se refiere a la compensación “total” para IG que está compuesta por el Tesoro subyacente, así como una compensación adicional que recibe el inversor por la tenencia de un bono en forma de diferencial de crédito.  Hablando específicamente de la valoración de los diferenciales de crédito, no tenemos una visión tan positiva sobre los diferenciales cuando prestamos atención a los rendimientos producidos con los niveles actuales de negociación, y creemos que los diferenciales terminaron el año cerca del extremo más ajustado del valor de mercado.  Si observamos los últimos 20 años de datos, el diferencial promedio del índice fue de 149, aunque este período incluye la Crisis Financiera Global (GFC) cuando el diferencial del índice se disparó a más de 600.  El punto bajo fue de 75 en marzo de 2005 y el más bajo del ciclo de crédito actual fue de 80 en 2021.  El diferencial del índice cerró el año en 99 y definitivamente es capaz de mantenerse operando lateralmente en este nivel durante un largo período de tiempo e incluso puede ajustarse a niveles más bajos a partir de aquí.  Pero queremos ser realistas con nuestros inversores sobre el potencial alcista de los diferenciales de crédito.  Creemos que los diferenciales de crédito están negociándose con una probabilidad relativamente alta de un impacto controlado, y cualquier dato que indique lo contrario (léase: recesión) provocará diferenciales más amplios.  La buena noticia es que cuando se comienza con un rendimiento superior al 5 %, hay un cómodo margen de seguridad disponible para la ampliación de los diferenciales mientras se generan rendimientos totales positivos.  También señalaríamos que la mayoría de las recesiones están acompañadas por una disminución de los rendimientos de los bonos del Tesoro, lo que podría compensar la ampliación de los diferenciales de crédito.

Tenemos una visión favorable de la salud general del mercado de créditos y creemos que la solidez de las métricas crediticias es convincente desde el punto de vista de la recompensa por el riesgo.  Si bien el punto máximo de las métricas crediticias del ciclo actual se produjo a finales de 2021, la solvencia del mercado de créditos con grado de inversión como un todo es estable e incluso algunas mediciones muestran una mejora.1Fi Según la investigación recopilada por Barclays, a finales del tercer trimestre de 2023, el apalancamiento neto para el índice fue 2,8 veces mayor, los márgenes de EBITDA fueron del 29,6 % y la cobertura de intereses fue de 12,7 veces mayor.a1 Si bien el apalancamiento y la cobertura de intereses no tuvieron tan buen desempeño como en los últimos años, estuvieron dentro de niveles razonables y mostraron una mejora reciente, mientras los márgenes de EBITDA han sido notablemente estables y estuvieron solo un 0,4 % por debajo de los máximos históricos.  Salvo unas pocas excepciones, las compañías calificadas con grado de inversión están en muy buena forma.

Posicionamiento de la cartera

Nos centramos en la gestión del riesgo crediticio a través de un proceso de investigación detallado; así que aunque tengamos una visión macro, pasamos la mayor parte del tiempo pensando en cómo esa visión más amplia puede afectar a las inversiones individuales dentro de las carteras de los clientes.  Como recordatorio, estructuramos cada cuenta individual administrada de la siguiente manera.

  • Diversificación: se ingresan datos iniciales para cada cliente individual o cartera institucional con 20 a 25 posiciones. Diversificamos las carteras buscando limitar cada cuenta a una exposición de 20 % a nivel sectorial y un 15 % a nivel de industria individual, con excepción del sector de Instituciones financieras (Finanzas).  Para el sector de Finanzas, limitamos cada cuenta a una exposición de 30 % porque este sector representa una amplia porción del índice de IG con una ponderación del 32,97 % a finales de 2023.
  • Calidad crediticia: uno de los mayores diferenciadores entre la cartera de CAM y el Índice radica en nuestro sesgo hacia créditos de mayor calidad, en el sentido de que buscamos limitar cada cuenta de cliente a una exposición del 30 % en bonos con calificación BAA. El índice tuvo una ponderación de 47,14 % en créditos con calificación BAA a finales de 2023 y esta cifra ha superado el 50 % varias veces para el índice en los últimos años: esto deja la cartera de CAM con una exposición significativamente menor a créditos de calificación más baja en comparación con el índice.
  • Vencimiento: siempre buscaremos posicionar la cartera dentro de una banda de vencimiento intermedio que oscila entre los 5 y 10 años. Ocasionalmente verá que mantenemos algunos vencimientos más cortos que vencen a menos de 5 años. Esto se da especialmente durante el entorno actual, donde ciertas partes de la curva del Tesoro están invertidas; queremos ser pacientes y permitir más tiempo para que nuestras operaciones de venta y extensión sean rentables.  Ocasionalmente también adquiriremos un bono con un vencimiento superior a 10 años pero esto no es habitual y una compra de esa naturaleza no tendrá una duración sustancialmente mayor a 10 años. Durante la fase de inversión, normalmente llenaremos nuevas carteras con vencimientos que fluctúan entre los 8 y los 10 años.  A medida que una cuenta se vuelve antigua, buscamos vender los bonos con aproximadamente 5 años de vencimiento y, a continuación, reinvertimos los ingresos de esas ventas en vencimientos de aproximadamente 10 años.  Como resultado de nuestro posicionamiento intermedio, a finales de 2023, nuestro compuesto tuvo una duración modificada de 5,4 en relación con la duración de 7,3 del índice.

La misión de nuestra Estrategia de grado de inversión es proporcionar a nuestros clientes rentabilidades superiores ajustadas al riesgo.  Nuestra meta es minimizar la volatilidad incurriendo en menos riesgo crediticio y menos riesgo de tasas de interés que con el índice.

Vigilancia de la Reserva Federal

En sus comentarios preparados después de la reunión de diciembre del Comité Federal del Mercado Abierto (FOMC), el presidente Powell dijo que “…nuestra tasa de referencia probablemente esté en su punto máximo, o cerca de él, para este ciclo de ajuste”.ii Aunque no descartó específicamente nuevas alzas en las tasas, cada vez está más claro que es improbable que la Reserva Federal vuelva a subirlas.  Ahora toda la atención se ha centrado en el relato del recorte de tasas de la Reserva Federal, lo que seguramente dominará el ciclo de noticias empresariales en 2024.  La versión más reciente del “gráfico de puntos” de la Reserva Federal lanzado en su reunión de diciembre mostró que la banca central espera recortes de 0,75 % en las tasas para 2024.  Una manera de interpretarlo es que si la Reserva Federal opera con aumentos de 25 puntos básicos, se prevén recortes en las tasas tres veces en el año.  Cabe destacar que el gráfico de puntos solo es la mejor estimación en un punto temporal específico y no implica necesariamente que la estimación por consenso se hará realidad.  Por ejemplo, el gráfico de puntos publicado en la reunión de septiembre de 2023 mostró que habría un aumento de 25 puntos básicos adicionales en 2023, pero eso no ocurrió.

La Reserva Federal causó un revuelo con sus comentarios moderados en su reunión de diciembre.  Una medición que rastreamos para evaluar la percepción del mercado es el índice de condiciones financieras de Goldman Sachs, que es un promedio ponderado de tasas de interés a corto y largo plazo, el valor del dólar estadounidense, los diferenciales de crédito y la relación de los precios de las acciones con el promedio de 10 años de las ganancias por acción (EPS).

Como se puede ver en el gráfico anterior, las condiciones se fueron ajustando rápidamente en septiembre y octubre, antes de que empezaran a relajarse rápidamente, comenzando con la reunión del FOMC del 1 de noviembre y nuevamente en la reunión del 13 de diciembre (indicado por la línea vertical del gráfico).  No consideramos que se trate necesariamente de un error de política, pero creemos que la conferencia de prensa de diciembre fue una oportunidad perdida para el presidente Powell de oponerse a la relajación de las condiciones financieras, que terminaron el 2023 cerca de los niveles más cómodos del año.  La economía de Estados Unidos sumó 4.8 millones de empleos en 2022 y otros 2.7 millones en 2023.iii Creemos que el umbral para los recortes de las tasas a corto plazo es bastante alto, a menos que la economía experimente una desaceleración proporcional del crecimiento del empleo en 2024.

Esto nos conduce a nuestra reflexión final respecto de la política de la Reserva Federal.  El margen deseado para los Fondos Federales fue de 5,25 % a 5,5 % al final del año y la tasa efectiva de Fondos Federales, según los datos recopilados por la Reserva Federal de Nueva York, fue del 5,33 % a finales de 2023.  Un movimiento de 75 puntos básicos en una tasa efectiva de 5,33 % supone una disminución porcentual de 14 %.  Nos preguntamos si la perspectiva de un movimiento de apenas el 14 % es realmente suficiente para sostener la exuberancia que experimentaron los activos de riesgo en los últimos dos meses de 2023.  Creemos que, independientemente de lo que digan, esta Reserva Federal tiene la determinación de no repetir los errores del pasado y debe tener la máxima confianza en que la inflación llegará a su objetivo del 2 % antes de comenzar a tener un impacto significativo en los recortes de tasas.  La mejor manera que tiene la Reserva Federal para lograr esto es mantener su tasa de referencia “más alta por más tiempo”. Un período prolongado de tasas elevadas no es necesariamente algo malo para los bonos ni para las empresas con calificación de grado de inversión y balances sólidos, pero podría representar un obstáculo para las acciones y ciertos sectores de la economía, como el mercado comercial de bienes raíces.  En última instancia, creemos que una tasa “más alta por más tiempo” disminuye la posibilidad de un impacto controlado y aumenta la probabilidad de que la economía entre en una recesión cerca del final de 2024 o en algún momento de 2025.  El marco temporal de esta opción siempre es la parte más difícil.

De cara al futuro

Gracias por su continuo entusiasmo y apoyo y por depositar su confianza en nosotros para administrar el capital que tanto esfuerzo les costó ganar.  Ansiamos colaborar con ustedes en 2024.

.

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. 

 

The information provided in this report should not be considered a recommendation to purchase or sell any particular security.  There is no assurance that any securities discussed herein will remain 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.  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.


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 Barclays Bank PLC, December 11 2023 “US Investment Grade Credit Metrics, Q3 23 Update: Stable”

ii Federal Reserve System Board of Governors Chairman Jerome H. Powell News Conference, December 13 2023 “Federal Reserve System”

iii The Wall Street Journal, January 5 2024 “Job Gains Picked Up in December Capping Year of Healthy Hiring”

19 Jan 2024

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • A back-and-forth start to the year has continued this week for the US junk bond market, which rose last week after starting 2024 with a loss.
  • Yields have climbed 19 basis points since last Friday to 7.90%, following a week of robust economic data on retail sales, housing sentiment, industrial production and unemployment claims. The readings renewed concerns that the Federal Reserve may delay easing interest-rate policy, with investors paring rate-cut bets and Treasury yields climbing.
  • High-yield’s losses gained legs as Fed Governor Christopher Waller’s comments Tuesday signaled the central bank isn’t in a hurry to cut rates
  • Atlanta Fed President Raphael Bostic joined the chorus Thursday, urging policymakers to proceed cautiously toward rate cuts
  • At the same time, strong data supported the soft landing narration and bolstered views that a recession is unlikely
  • US borrowers crowded the primary market during this holiday-shortened week as yields are still below 8% and spreads are under 350 basis points
  • More than $5.5b of deals were priced, putting January’s total above $12b and at 60% of volume in the opening month of 2023
  • Junk bond yields climbed across ratings. BB yields jumped 18 basis points week-to-date to 6.58%

 

(Bloomberg)  Waller Urges Cutting Rates ‘Carefully’ If Inflation Cools

 

  • Federal Reserve Governor Christopher Waller said the US central bank should take a cautious and systematic approach when it begins cutting interest rates, a process that can start this year absent a rebound in inflation.
  • “As long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year,” Waller said at a virtual event hosted by the Brookings Institution on Tuesday.
  • “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he added.
  • The Fed governor offered some of the most detailed remarks to date around the Fed’s intentions to ease policy this year. While Waller showed an openness to cutting rates, his comments also appeared to push back against market expectations for as many as six rate cuts this year.
  • “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past,” he said, pointing to previous economic shocks that have precipitated rapid rate cuts.
  • Treasury yields jumped in the wake of Waller’s comments. Traders pared back the probability of a rate cut as soon as March as well as the degree of total policy rate declines seen for the full year.
  • He said the timing of cuts and the actual number “will depend on the incoming data.”
  • Waller’s remarks highlighted his intention to balance risks to both sides of the Fed’s mandate and avoid staying restrictive for too long, while also not beginning to reduce rates before their 2% inflation goal was secure. He noted that he needs to see a moderation in consumption and hiring as well as continued low readings on monthly inflation data to bolster the case for a cut.
  • While Waller said he’s becoming more confident that policymakers are “within striking distance” of reaching their 2% inflation target, “I will need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably toward our inflation goal.”
  • If policymakers see a continuation in the trends seen in the real data and inflation data, “we can slowly calibrate the real rate cut down,” he said. “If we think we need to move it faster, we can move it faster depending on what the data says. But the key is we have the flexibility that we can be methodical and careful.”
  • He added that once the Fed is relatively convinced that inflation is sustainably near the central bank’s 2% target, policymakers can “start thinking how fast we want to cut, or how long, what the pace is, or how big.”
  • As for the central bank’s balance sheet, Waller said it would be reasonable to start thinking about slowing the pace of asset runoff “some time this year.”
  • While Waller’s language suggested he favors starting rate cuts sooner rather than later, his comments also weren’t “a ringing endorsement” for a March cut, Bank of America’s Michael Gapen wrote. Instead, he said, the key takeaway of Waller’s speech related to the pace of easing.
  • Economists at Goldman Sachs also noted that Waller’s remarks “raise the risk that the first cut could come slightly later than our forecast of March and that the pace of cuts could be quarterly from the outset.”

 

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.

19 Jan 2024

CAM Investment Grade Weekly Insights

Credit spreads are looking to finish the week on a strong note, trading at the tightest levels of the year as we go to print.  The Bloomberg US Corporate Bond Index closed at 95 on Thursday January 18 after having closed the week prior at 97.  The 10yr is trading a 4.16% this Friday morning, up sharply on the week after having closed the week prior at 3.94%.  The benchmark rate is now trading at its highest yield of the New Year.  Through Thursday, the Corporate Index YTD total return was -1.35%.

 

Economics

It was a busy week for economic data with several market moving prints.  December retail sales data on Wednesday came in with a larger increase than expected, fueling higher Treasury yields.  On Friday, consumer sentiment rose to its highest level since January 2021, far in excess of the estimate.  The data also showed that consumers expect prices will increase at an annual rate of 2.9% over the next year, down from 3.1% a month earlier.  So far in 2024, the data has served to cool market expectations of near term Fed rate cuts.  The market went from anticipating as many as 6 cuts in 2024 but now the expectation has shifted to 3 or 4 cuts based on interest rates futures.  The next 10 days will be busy from a data perspective, culminating in a FOMC meeting on January 31.

Issuance

It was a huge week of issuance especially considering that the market was closed on Monday in observance of Martin Luther King Day.  With no new deals on Friday, issuers managed to print >$49bln of new debt in three days bring supply for the month of January to nearly $150bln.  Investor demand has been strong and new issue concessions have shrunk in concert as investors have gobbled up new paper leaving most new issues to immediately trade better in the secondary market.  Another strong week could easily see this January surpass the all-time January record of $175bln that was set in 2017.

Flows

According to Refinitiv Lipper, for the week ended January 17, investment-grade bond funds reported a net inflow of +$227.3mm.  This was the fifth consecutive weekly inflow for IG funds.

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 Dec 2023

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

 

  • The fourth quarter US junk bond rally spurred by the Federal Reserve drove yields further down to a new 16-month low of 7.69% and spreads to a another 20-month low of 329 basis points accelerating gains in CCCs, the riskiest tier of the junk bond market.
  • CCC yields tumbled to a 10-month low of 12.26% and spreads closed at a 19-month low of 787 basis points.
  • CCCs amassed gains of almost 19%, the best year since 2016. The fourth quarter returns so far stand at 5.95%, on track to be the biggest quarterly gains since December 2020.
  • CCCs are the best asset class in the US fixed income market as they outperform single Bs, BBs and investment grade.
  • Bloomberg Economics expects that the Fed will lead the way with 125 basis points of cuts over the course of 2024, Tom Orlik wrote on Tuesday.
  • After the Fed’s own quarterly projections indicated that the central bank will lower interest rates by 75 basis points next year, yields and spreads dropped across all ratings in the US high yield market.
  • BB yields dropped to a new 10-month low of 6.41%. Yields have fallen 158 basis points since the November Fed meeting and 59 basis points so far this month. Spreads were at 205 basis points, down 90 basis points year-to-date after falling 120 basis points so far this quarter.
  • The rally drew both borrowers and investors into the market, spurring new bond sales.
  • The primary market is expected to be largely quiet ahead of the holidays.
  • Forecasts for junk-bond supply in 2024 generally range from around $200 billion to $230 billion.

 

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.