Insight – Page 20 – Cincinnati Asset Management

09 Dec 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads were mostly flat throughout the week without much change. The Bloomberg US Corporate Bond Index closed at 130 on Thursday December 8 after having closed the week prior at 130. Treasury volatility moderated this week as rates did not move materially for the first time in several weeks. The 10yr Treasury closed the week prior at 3.49% and it is trading at 3.53% as we go to print. Through this Thursday the Corporate Index had a YTD total return of -13.6% while the YTD S&P500 Index return was -15.6% and the Nasdaq Composite Index return was -28.8%.

The most meaningful economic data of the week was released this Friday morning. U.S. producer prices rose more than forecast during the month of November. This could lend credence to the case for additional Fed rate hikes but it was the smallest annual increase in PPI in 18 months so the Fed will be pleased to see that things are moving in the right direction. Also on Friday morning we learned that consumer sentiment improved and consumer concerns over inflation have eased over the course of the last month. These data points were merely appetizers as a feast of economic data awaits us next week. Things get started with the CPI release on Tuesday morning –if inflation comes in hotter than expected then it could make for a very volatile trading session. On Wednesday afternoon we get an FOMC rate decision followed by rate decisions by the ECB and BOE on Thursday morning. Each of these three central banks are expected to slow the pace of their rate hikes from 75bps to 50bps and if any of them deviate from this and surprise to the upside it could make for an interesting trading session.

The primary market had a slow week as it appears that most issuers have packed it in for the year. Just $4.25bln in new debt was priced and if this pattern holds then it could be the lowest volume for a December in more than 15 years according to data compiled by Bloomberg. The 2022 issuance tally stands at $1,180bln which trails 2021’s pace by ~14%.

Investment grade credit reported an inflow for the week. Per data compiled by Wells Fargo, outflows for the week of December 1–7 were +1.0bln which brings the year-to-date total to -$160.2bln.

02 Dec 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spread performance was mixed throughout the week with spreads set to finish the week slightly wider. The Bloomberg US Corporate Bond Index closed at 132 on Thursday December 2 after having closed the week prior at 130. Treasuries continued to exhibit the same type of volatility that we have become accustomed to in recent weeks. The 10yr Treasury closed last week at 3.68% and it is trading at 3.55% as we go to print. The 10yr closed above 4% as recently as November 9, so this has been a significant move lower in yield over the course of only 15 trading days. Through this Thursday the Corporate Index had a YTD total return of -14.3% while the YTD S&P500 Index return was -13.2% and the Nasdaq Composite Index return was -26.0%.

There was plenty of economic data to parse this week. Things really started to ramp on Wednesday with a GDP print that morning that gave market participants some hope that inflation may be turning the corner and headed lower as the numbers showed slowing personal consumption and a core PCE figure that declined in 3Q relative to 2Q. Chairman Powell gave a speech later that day at the Brookings Institution that indicated that the Fed was set to moderate the pace of rate increases at its meeting on December 14. This sent stocks higher and Treasury yields lower. We were surprised by this price action as a 50 basis point hike in December should not have been seen by the market as new information. We believe that markets for risk assets are simply too eager for the Fed pivot when in fact chair Powell has been crystal clear that the Fed will not look to ease financial conditions through rate cuts until it is obvious that inflation is headed lower, closer to its longer term target. The Friday nonfarm payroll report was stronger than expected and showed that the labor market continued to be strong in November. Job gains and robust wage growth are not what the Fed was hoping to see and that data gives further credence to our belief that the Fed will not be in a hurry to cut its policy rate. An elevated policy rate for a longer time period is not problematic for bond investors as it affords an opportunity to generate more income for new money and incremental purchases but it does make this exercise more difficult when the market is so quick to see any bad news as good news, sending Treasury yields lower in the process.

The primary market had a busy week as issuers priced more than $22bln in new debt. Amazon led the way as it printed $8.25bln across 4 tranches. The 2022 issuance tally stands at $1,176bln which trails 2021’s pace by ~13%.

Investment grade credit reported an outflow for the week. Per data compiled by Wells Fargo, outflows for the week of November 24–30 were -$3.9bln which brings the year-to-date total to -$161.1bln.

02 Dec 2022

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

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$47.5 billion. New issuance for the week was nil and year to date issuance is at $101.2 billion.

(Bloomberg) High Yield Market Highlights

U.S. junk bonds are poised to gain for the fourth straight week, the longest winning streak since mid-August, with yields tumbling to mid-September lows after Federal Reserve Chair Jerome Powell signaled on Wednesday that the central bank will likely slow the pace of interest-rate increases. The biggest gains came on Thursday, when the market saw its best advance in more than three weeks after the Fed’s favored inflation gauge posted a smaller-than-expected monthly advance and data showed a cooling in the manufacturing sector.
The inflation measure, the personal consumption expenditures index, rose 0.3% in October, less than the 0.4% forecast by economists.
The rally that followed the release Thursday drove the junk-bond market to a weekly gain of 0.88% and pushed yields down to 8.43%, a more than 11-week low.
The gains spanned across ratings. CCC yields fell significantly below 14% to close at 13.83%, a more than 11-week low.
CCCs are also headed for the fourth straight week of gains, with week-to-date returns of 0.73%. The 0.99% gains on Thursday were the biggest one-day rally in three weeks.
The recent rally in the junk bond market was also partly fueled by lack of supply. The primary market is expected to largely remain quiet as banks work out of the losses from this year’s leveraged buyout debt.
October was the slowest month for new bond sales since 2008, with a mere $3.7b. November ground to a halt after a promising start to end with a modest $9b, the slowest for that month since 2018.
Year-to-date supply at $95b has also been the lightest in 14 years.
Junk bonds are losing steam early Friday post stronger than expected employment data.

(Bloomberg) Powell Signals Downshift Likely Next Month, More Hikes to Come

Chair Jerome Powell signaled the Federal Reserve will slow the pace of interest-rate increases next month, while stressing borrowing costs will need to keep rising and remain restrictive for some time to beat inflation.
His comments, in a speech Wednesday at the Brookings Institution in Washington, likely cement expectations for the Fed to raise interest rates by 50 basis points when they meet Dec. 13-14, following four straight 75 basis-point moves.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in the text of his speech. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”
The Fed’s actions — the most aggressive since the 1980s — have lifted the target range of their benchmark rate to 3.75% to 4% from nearly zero in March. Powell said rates are likely to reach a “somewhat higher” level than officials estimated in September, when the median projection was for 4.6% next year. Those projections will be updated at the December meeting.
Investors see the Fed pausing hikes in the second quarter once rates reach about 5%, according to pricing in futures contracts.
Powell said the central bank is forecasting 12-month inflation based on its preferred gauge, the personal consumption expenditures price index, of 6% through October, and a 5% core rate.
There hasn’t been enough strong evidence to make a convincing case that inflation will soon decelerate, he said.
“It will take substantially more evidence to give comfort that inflation is actually declining,” he said. “The truth is that the path ahead for inflation remains highly uncertain.”
He added that “despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.”
Powell launched into a discussion of service costs, focusing on scarce supply in the labor market, with the gap in labor-force participation mostly explained by pandemic-era retirements in his view.
“These excess retirements might now account for more than 2 million of the 3 1/2 million shortfall in the labor force,” he said.
He said the labor market is only showing “tentative signs” of what he called “rebalancing,” while wages are “well above” levels consistent with 2% inflation over time.

10 Nov 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads were unchanged on the week until the CPI print sent spreads tighter on Thursday morning. If this “risk-on” trade has legs, then spreads will finish the week in solidly positive territory. The credit market is closed this Friday in observance of Veteran’s Day but equities will remain open. The Bloomberg US Corporate Bond Index closed at 152 on Wednesday November 9 after having closed the week prior at 152. Treasury yields are sharply lower on the week with the bulk of that move occurring after CPI at 8:30am this morning. The 10yr Treasury closed last Friday evening at 4.16% and it is trading at 3.92% as we go to print. Through Wednesday the Corporate Index had a YTD total return of -19.5% while the YTD S&P500 Index return was -20.3% and the Nasdaq Composite Index return was -33.4%.

It was a lighter week for economic data relative to the last few weeks due in part to the fact that there were only 4 trading days. The big news of the week was CPI on Thursday, which was weak across the board. Recall that the last couple of CPI prints came in hotter than expectations. This is only one data point, so it cannot be called a trend, but it is a welcome relief to bond investors to see this number move in a favorable direction for a change. The next CPI release is on December 13 and the next FOMC decision is on December 14. There is also an employment report on December 2 as well as other economic data that will help guide the Fed. It will be interesting to see if the data allows the Fed to take its foot off the gas and back off from 75bps to 50bps at its December meeting.

The primary market was extremely active this week as 28 companies issued over $45bln of new debt across just three trading days. It is worth noting that the high yield primary market has thawed as well and it posted its busiest week since June. There are no new investment grade deals pending as we go to print on Thursday morning. The 2022 issuance tally stands at $1,125bln in volume which trails 2021’s pace by ~12%.

04 Nov 2022

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

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $4.7 billion and year to date flows stand at -$55.1 billion. New issuance for the week was $1.5 billion and year to date issuance is at $93.5 billion.

(Bloomberg) High Yield Market Highlights

U.S. junk bonds are set for the biggest weekly loss in six, snapping a two-week gaining streak as yields surge to 9.22% as recession fear spurred a selloff in equities and an extreme inversion in a key portion of the Treasury yield curve. The low-grade market erased most recent gains across ratings. CCCs, the riskiest of junk bonds, posted a loss of 1.04% Thursday, the biggest one-day fall in more than four months. That’s put the notes on track to end a two-week gaining stretch, with a week-to-date drop of 1.08%.
The October rally fueled and lured investors into junk bond market as US high-yield funds reported a cash intake of $4.7b for the week, the third biggest weekly inflow this year.
The cash haul came in at the time of acute shortage of new supply, bolstering secondary market prices as investors looked for new paper. The primary market was mostly quiet until this week.
The rally brought some relief to bankers who have long waited to clear all pending deals to fund leveraged buyout. Apollo’s Tenneco was the first to get out of the gate earlier this week. Nielsen Holdings, a US TV rating business firm, kicked off a bond sale Wednesday to fund its buyout by Elliott Investment Management and Brookfield Asset Management.
Satellite TV company Dish Network also jumped into the market Wednesday to start marketing 5-year notes to fund the build-out of wireless infrastructure, among other purposes.
The rally was sapped after the Federal Reserve signaled a higher terminal rate against a backdrop of slowing growth.
Despite continued near-term pressures Morgan Stanley expects a “significant deceleration in the inflation path” to take hold by mid-2023, Morgan Stanley’s Srikanth Sankaran wrote last week.

(Bloomberg) Powell Sees Higher Peak for Rates, Path to Slow Tempo of Hikes

Federal Reserve Chair Jerome Powell opened a new phase in his campaign to regain control of inflation, saying US interest rates will go higher than earlier projected, but the path may soon involve smaller hikes.
Addressing reporters Wednesday after the Fed raised rates by 75 basis points for the fourth time in a row, Powell said “incoming data since our last meeting suggests that ultimate level of interest rates will be higher than previously expected.”
Powell said it would be appropriate to slow the pace of increases “as soon as the next meeting or the one after that. No decision has been made,” he said, while stressing that “we still have some ways” before rates were tight enough.
“It is very premature to be thinking about pausing,” he said.
The Federal Open Market Committee said that “ongoing increases” will still likely be needed to bring rates to a level that are “sufficiently restrictive to return inflation to 2% over time,” in fresh language added to their statement after a two-day meeting in Washington.
The Fed’s unanimous decision lifted the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008.
“Slower for longer,” declared JP Morgan Chase & Co, chief US economist Michael Feroli in a note to clients. “The Fed opened the door to dialing down the size of the next hike but did so without easing up financial conditions.”
Officials, as expected, said they will continue to reduce their holdings of Treasuries and mortgage-backed securities as planned.
The higher rates go, the harder the Fed’s job becomes. Having been criticized for missing the stubbornness of the inflation surge, officials know that monetary policy works with a lag and that the tighter it becomes the more it not only slows inflation, but economic growth and hiring too.
Still, Powell stressed that they would not blink in their efforts to get inflation back down to their 2% target.
“The historical record cautions strongly against prematurely loosening policy,” he said. “We will stay the course, until the job is done.”
Fed forecasts in September implied a 50 basis points move in December, according to the median projection. Those projections showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024. Powell’s remarks made clear that the peak signaled in that projection would be higher if it came at this meeting.
No fresh estimates were released at this meeting and they won’t be updated again until officials gather Dec. 13-14, when they will have two more months of data on employment and consumer inflation in hand.

04 Nov 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads look as though they will finish the week slightly tighter. The Bloomberg US Corporate Bond Index closed at 155 on Thursday November 3 after having closed the week prior at 158. Treasury yields moved higher during the week. The 10yr Treasury closed last Friday evening at 4.01% and it is trading at 4.17% as we go to print this Friday afternoon. Through Thursday the Corporate Index had a YTD total return of -19.7% while the YTD S&P500 Index return was -20.9% and the Nasdaq Composite Index return was -33.5%.

It was an active week for central bankers and there was plenty of economic data to parse. The FOMC raised the policy rate by 75bps for the fourth consecutive meeting, moving the benchmark to a target range of 3.75% to 4%. This move was largely expected by markets but some investors may not have been sufficiently prepared for Powell’s comments which were perceived as hawkish in nature. In our view this should not have come as a surprise as Fed officials have been consistently hawkish in recent weeks. Powell did indicate that the committee may look to slow the pace of Fed Funds rate increases but that they are committed to seeing this through to the end in order to tame inflation. We think that this level of commitment increases the probability that the economy will start to slow significantly in the months ahead. Not to be outdone by the FOMC, the Bank of England was on the tape Thursday with a 75bps hike but its rhetoric was much more dovish than the U.S. central bank. The BOE warned investors that market expectations for its terminal rate have overshot, and that while additional rate hikes may be required, the bank will be careful to limit the associated impact on economic growth. The BOE expects that GDP for the UK will contract for eight consecutive quarters until mid-2024. The final major piece of data came on Friday morning when the October jobs report showed that the U.S. labor market was still quite healthy. Although the unemployment rate did tick higher from 3.5% to 3.7%, it is clear that the labor market was still too tight relative to FOMC expectations. Futures contracts are pricing in a 50-basis point hike at the Fed’s December 14 meeting, but if the data over the next month does not paint a picture of slowing inflation then 75bps could be on the table once again.

Primary market activity in corporate credit was muted during the week. Borrowers brought just over $12bln in new debt to market relative to expectations that were looking for $15bln on the low-end. 2022 has seen over $1,080bln in new issue volume which trails 2021’s pace by ~12%.

Investment grade funds reported a modest outflow for the week. Per data compiled by Wells Fargo, inflows for the week of October 27–November 2 were -$0.4bln which brings the year-to-date total to -$147bln.

28 Oct 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads will likely finish the week tighter. The Bloomberg US Corporate Bond Index closed at 161 on Thursday October 27 after having closed the week prior at 164. Treasury yields drifted lower throughout the week. The 10yr Treasury closed last Friday evening at 4.22% and it is trading at 3.99% as we go to print this morning. Through Thursday the Corporate Index had a negative YTD total return of -19.1% while the YTD S&P500 Index return was -19.1% and the Nasdaq Composite Index return was -30.4%.

It was an extremely active week for economic data and rate decisions by global central banks. We cannot cover it all in this brief note but we will do our best to hit the highlights. Early in the week, data releases showed housing prices that slowed more than expected and a consumer confidence number that was underwhelming relative to expectations. US 30-year mortgage rates topped 7% for the first time since 2001 and mortgage applications continued to slow. On the bright side, new home sales were a slight beat relative to expectations and the third quarter US GDP report showed that growth rebounded into positive territory after two consecutive quarters of contraction. On the central bank front, The Bank of Canada surprised investors with a half-percentage point increase in its policy rate from 3.25% to 3.75%. Investors were expecting the BOC to increase by 75 basis points. The BOC also made comments that indicate that, while it is not done with rate increases, it is getting closer to the end of its hiking cycle. Lastly, the European Central Bank raised its policy rate by 75 basis points to 1.5%, its highest level in more than a decade. ECB President Lagarde said further rate hikes are on the horizon but her tone was cautious given the deteriorating outlook for the Eurozone economy as the region barrels toward a recession. Overall, the news flow continues to paint a mixed picture and there were pieces of data that both hawks and doves could cling to.

It was an active week in the primary market as 13 borrowers priced more than $34bln in new debt through Thursday. There is one deal pending on Friday morning that will push that total further as Honeywell is looking to tap the market for up to $2bln spread across several tranches. Next week will likely bring more muted issuance volumes with the FOMC meeting on Wednesday –market prognosticators are calling for $15-$20bln of issuance weighted toward the front end of the week. 2022 has seen over $1,066bln in new issue volume which trails 2021’s pace by about 13%.

Investment grade funds reported their first inflow in 9 weeks. Per data compiled by Wells Fargo, inflows for the week of October 20–26 were +$1.6bln which brings the year-to-date total to -$146.6bln.

28 Oct 2022

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

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $3.7 billion and year to date flows stand at -$59.9 billion. New issuance for the week was nil and year to date issuance is at $92.0 billion.

(Bloomberg) High Yield Market Highlights

U.S. junk bonds are headed for their biggest weekly gain in more than three months after a four-session rally as investors flooded the market with cash looking for new paper. A gauge of the debt rose 0.57% Thursday, the biggest one-day gain in more than three weeks. It was headed for the best week since June, up 1.93% so far this week. The rally was partly fueled by investors returning to the asset class as US high-yield funds reported a cash influx of $3.7b for the week.
The cash haul came at a time when the junk bond primary market faced an acute shortage of new supply, helping to bolster secondary-market prices.
October supply is down by more than 85% from 2021; The year-to-date supply is the lowest since 2008 at $92b, versus more than $415b for the same period last year.
The recent rally in junk bonds suggests the high-yield market is slowly coming around to the view that inflation’s pace is slowing and may begin to decline in the middle 2023.
Despite continued near-term pressure, Morgan Stanley expects a “significant deceleration in the inflation path” to take hold by mid-2023, Srikanth Sankaran wrote on Monday.
A potential window of respite from rates volatility and a more dispersed period of earnings risk should help to provide tactical support for credit markets, Sankaran wrote.
Amid this issuance-starved market, a group of banks led by Citigroup may sell as soon as next month part of a leveraged loan that’s financing Apollo’s buyout of Tenneco, according to people with knowledge of the matter.
The rally extended across all high yield ratings. Yields tumbled to a five-week low of 9.12% after falling for five sessions in a row, the longest declining streak in almost three months. Yields fell 56bps in the last four sessions.
Single B and BB rated bond yields also fell to a five-week low of 9.35% and 7.33%, respectively.
CCCs, the riskiest of junk bonds are up 1.52% this week as of Thursday, set for the biggest weekly advance in almost three months. CCC yields dropped 38bps this week to close at 15.44%, a more than two-week low.

14 Oct 2022

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

CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.0 billion and year to date flows stand at -$61.7 billion. New issuance for the week was $1.2 billion and year to date issuance is at $89.6 billion.

(Bloomberg) High Yield Market Highlights

U.S. junk bonds shrugged off the equity rally as yields climbed toward 10%. CCC yields, the riskiest of junk bonds, jumped to a 30-month high of 15.79% after core US inflation rose by more than forecast, pressuring the Federal Reserve to keep raising interest rates again. Junk bonds are set to end the week with a decline, heading for a fourth weekly loss in five. The bonds were down 1.2% so far this week as yields rose to 9.70%.
The rise in core consumer price index only reinforced the Fed officials’ commitment to raise rates to a restrictive level in the near term and holding them there to curb inflation.
The heightened asset volatility, as the Fed is expected to hike another 75bp in November with core inflation at multi-decade highs, increases tail risks for the economy and markets, Barclays’s Brad Rogoff wrote on Friday.
The losses spanned across ratings in junk bond market, with CCCs posting losses of 1.44% week-to- date, the most in two weeks.
Macro volatility, steady losses and continuing concern that the Fed may disrupt growth rattled junk bond investors.
The high yield primary market volume has been low amid rising cost of debt.
Third quarter supply was a modest $19b, the lowest 3Q volume since 2008.
New bond sales in September totaled $9b, the slowest September since 2011.
Year-to- date volume was at $88b, the lowest since 2008 and down about 78% from 2021.

(Bloomberg) Core US Inflation Rises to 40-Year High, Securing Big Fed Hike

A closely watched measure of U.S. consumer prices rose by more than forecast to a 40-year high in September, pressuring the Federal Reserve to raise interest rates even more aggressively to stamp out persistent inflation.
The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982, Labor Department data showed Thursday. From a month earlier, the core CPI climbed 0.6% for a second month.
The overall CPI increased 0.4% last month, and was up 8.2% from a year earlier.
The advance was broad based. Shelter, food and medical care indexes were the largest of “many contributors,” the report said. Prices for gasoline and used cars declined.
On the heels of a solid jobs report last week, the inflation data likely cement an additional 75-basis point interest rate hike at the Fed’s November policy meeting and spurred speculation for a fifth-straight increase of that size in December. Traders also priced in a higher peak Fed rate for next year.
Policy makers have responded with the most aggressive tightening campaign since the 1980s, but so far, the labor market and consumer demand have remained resilient. The unemployment rate returned to a five-decade low in September, and businesses continue to raise pay to attract and retain the employees needed to meet household demand.
The CPI report is the last one before next month’s U.S. midterm elections and poses fresh challenges to President Joe Biden and Democrats as they seek to retain thin congressional majorities. Already, the surge in inflation has posed a serious threat to those prospects.
Shelter costs — which are the biggest services’ component and make up about a third of the overall CPI index — rose 0.7% for a second month. Both rent of shelter and owners’ equivalent rent were up 6.7% on an annual basis, the most on record.
Economists see the housing components of the report as being elevated for quite some time, given the lag between real-time changes in rents and home prices and when those are reflected in Labor Department data. Bloomberg Economics doesn’t expect year-over-year rates for the major shelter components to peak until well into the second half of next year.
While the Fed bases its 2% target on a separate inflation measure from the Commerce Department — the personal consumption expenditures price index — the CPI is closely watched by policy makers, traders and the public.
Fed officials have repeatedly emphasized in recent weeks the need to get inflation under control, even if that means higher unemployment and a recession. In minutes from their September meeting released Wednesday, many policy makers emphasized “the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.”

12 Oct 2022

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

2022 Q3 High Yield Quarterly

In the third quarter of 2022, the Bloomberg US Corporate High Yield Index (“Index”) return was ‐0.65% bringing the year to date (“YTD”) return to ‐14.74%. The S&P 500 stock index return was ‐4.89% (including dividends reinvested) for Q3, and the YTD return stands at ‐23.88%.

The 10 year US Treasury rate (“10 year”) generally marched higher after a small dip in July as the rate finished at 3.83%, up 0.82% from the beginning of the quarter. Over the period, the Index option adjusted spread (“OAS”) tightened 17 basis points moving from 569 basis points to 552 basis points. The higher quality segments of the High Yield Market participated in the spread tightening as BB rated securities tightened 50 basis points, and B rated securities tightened 12 basis points. Meanwhile, CCC rated securities widened 61 basis points. The chart below from Bloomberg displays the spread moves in the Index over the past ten years with an average level of 430 basis points.

The Energy, Transportation, and Other Industrial sectors were the best performers during the quarter, posting returns of 1.28%, 1.20%, and 0.54%, respectively. On the other hand, Banking, Consumer Non‐Cyclical, and Brokerage were the worst performing sectors, posting returns of ‐3.91%, ‐2.82%, and ‐2.06%, respectively. At the industry level, aerospace and defense, refining, and gaming all posted the best returns. The aerospace and defense industry posted the highest return 3.49%. The lowest performing industries during the quarter were pharma, healthcare REIT, and retailers. The pharma industry posted the lowest return ‐9.57%. Crude oil has continued trending lower as can be seen on the chart at the left. OPEC+ members just met and agreed to cut oil production by two million barrels per day in a bid to help support the price of oil in the face of a weakening global economy. However, it is noted that the impact to supply is likely to be smaller than the headline number. “OPEC and its partners have been meeting online on a monthly basis and weren’t expected to arrange an inperson gathering until at least the end of this year. The slump in prices may have been what prompted the change of tack, requiring the first face‐to‐face talks since 2020.”ⁱ

The primary market remained very subdued during the third quarter. The weak market led to year‐to‐date issuance of $95.2 billion and $19.6 billion in the quarter. That is the lowest quarter of issuance in four years. Discretionary took 37% of the market share followed by Technology at a 28% share. Currently, there isn’t much concern for lack of capital access due to issuers being so proactive with refinancing in the past few years. In fact, only about $50 billion in high yield bonds are due to mature from now through the end of 2023.

After the Federal Reserve lifted the Target Rate by 0.75% at their June meeting, Fed Chair Jerome Powell acknowledged that the hike was “an unusually large one.” It may have been a large one, but apparently it was not enough as the Fed raised an additional 0.75% at both the July and September meetings. For those keeping score, that brings the Fed to 300 basis points of raises this year.

The dot plot chart shows how the Fed projections of the 2022 year‐end Target Rate have evolved over the past year. The Fed was clearly behind the curve and now believes stuffing the market with three consecutive “unusually large” hikes in a singular bid to break inflation is the appropriate move, notwithstanding all the other consequences. “We have always understood that restoring price stability while achieving a relatively modest increase in unemployment and a soft landing would be very challenging,” Powell said. “We have got to get
inflation behind us. I wish there were a painless way to do that. There isn’t.”ⁱⁱ Based on the Fed’s Summary of Economic Projections, they accept that the continuing rate hikes are going to lower growth and push up unemployment.

Intermediate Treasuries increased 82 basis points over the quarter, as the 10‐year Treasury yield was at 3.01% on June 30th, and 3.83% at the end of the third quarter. The 5‐year Treasury increased 105 basis points over the quarter, moving from 3.04% on June 30th, to 4.09% at the end of the third 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 second quarter GDP print was ‐0.6% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2022 around 1.6% with inflation expectations around 8.0%.ⁱⁱⁱ

Being a more conservative asset manager, Cincinnati Asset Management Inc. 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. Due to the continued rate moves, this positioning was a detractor of performance in the quarter as short‐end maturities outperformed. Further, our credit selections within communications and energy were a drag on performance. Benefiting our performance was our lack of exposure to pharma and our credit selections within healthcare. All totaled, the CAM High Yield Composite Q3 net of fees total return of ‐1.38% underperformed the Index. The Composite YTD net of fees total return of ‐17.06% also underperformed the Index.

The Bloomberg US Corporate High Yield Index ended the third quarter with a yield of 9.68%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), had an average of 25 over the quarter moving from a low of 20 in mid‐August to a high of 32 atthe end of September. For context, the average was 15 over the course of 2019, 29 for 2020, and 19 for 2021. The third quarter had two bond issuers default on their debt. The trailing twelve month default rate stands at 0.83%.iv The current default rate is relative to the 0.92%, 0.27%, 0.23%, 0.86% default rates from the previous four quarter end data points listed oldest to most recent. The fundamentals of high yield companies still look good considering the economic backdrop. From a technical view, fund flows were positive in July but negative in August and September. The 2022 year-to‐date outflow stands at $61.5 billion.^v Without question there has been a fair amount of damage in bond markets so far this year. It is important to remember that bonds are a contractual agreement with a defined maturity date. Thus, despite price volatility, without default, par will be paid at the stated maturity date. Currently, defaults are quite low and fundamentals are still providing a cushion. 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.

As we move into the last quarter of 2022, fixed income markets remain pressured as the Fed continues raising the Target Rate. The US dollar has been moving higher all year. Over 80% of central banks around the world are now hiking, the highest percentage on record.vi Japan has taken to currency intervention. The Bank of England is hiking while the British government is pushing through their largest tax cut package since 1972. Citi’s London team commented that euro credit markets are disorderly. Subsequently, the Bank of England started buying gilts while some of the tax cut package was walked back. Back in the US with the message from the Fed steadfast, caution is warranted as uncertainty remains around the cycle’s terminal rate and the resulting depth of an intentional economic slowdown. Markets have been roughed up this year, but brighter days will eventually appear. As this cycle plays out, current uncertainty and volatility can create opportunities that lead back to positive returns. Our exercise of discipline and selectivity in credit selections 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.

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.

i Bloomberg October 4, 2022: OPEC+ Considers Output Limit Cut
ii Bloomberg September 22, 2022: Powell Signals Recession May Be the Price for Crushing Inflation
iii Bloomberg October 3, 2022: Economic Forecasts (ECFC)
iv JP Morgan October 3, 2022: “Default Monitor”
v Wells Fargo September 29, 2022: “Credit Flows”
vi Goldman Global Markets Insights September 23, 2022: Markets/Macro

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