Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.8 billion and year to date flows stand at -$5.6 billion.  New issuance for the week was $15.4 billion and year to date issuance is at $129.7 billion.

 (Bloomberg)  High Yield Market Highlights 

• Year-to-date U.S. junk-bond returns turned negative for the first time since January, and are set to post a weekly loss after Thursday’s 0.29% decline. It was the biggest one-day drop in three weeks, according to data compiled by Bloomberg. This would mark the fifth consecutive week of losses and the longest stretch of weekly declines since August 2013.
• Yields jumped 13bps to close at a 15-week high of 4.57%, the most in three weeks. Spreads were steady, widening by 5bps to +337 as the 5Y UST rose 6bps to 0.86% on Thursday
• While yields rose, spreads remained intact and “avoided volatility” as the demand backdrop remained supportive despite concerns about retail outflows, Barclays strategist Brad Rogoff wrote on Friday
• “Strong economic growth should allow higher-beta credit to hold its recent outperformance”
• As returns turned negative and investors showed some weariness, there was no serious risk aversion as retailer Neiman Marcus is set to price a $1b offering of five-year notes, rated Caa2/CCC+, as soon as today
• Proceeds of the deal will be used to repay debt it incurred to exit bankruptcy in September
• Junk bonds have come under pressure after pricing more than $40b this month, just about $2b short of making this the busiest March on record. The most active March came in 2017, with $42.165b sold. This year’s first quarter has seen almost $130b of supply, the second-busiest quarter ever
• BB yields rose to a four-month high of 3.72% while spreads held firm widening just 3bps when 5Y UST rose 6bps
• CCCs, the riskiest tier of junk bonds, also posted a loss of 0.2% on Thursday. Yields rose 19bps to 6.76%
• Stock futures rebounded after dropping overnight as the Nasdaq climbed this morning. Oil tried to recover this morning but was heading for the biggest weekly loss since October

(Bloomberg)  Powell Faces Tough Campaign to Convince Traders of Fed’s Resolve

• The Federal Reserve succeeded in pushing back against market expectations for a rate hike in the next two years, but only partially.
• The central bank envisages keeping rates near zero to the end of 2023 despite a significantly brighter assessment of growth and higher inflation over the near term. After the release, traders trimmed some of the more-aggressive positioning they’ve been building for a “lift-off” by earlier in 2023.
• But a 25 basis-point hike by the first quarter that year is still reflected in Eurodollar futures, which are priced off Libor and are a decent proxy for future borrowing costs. So traders haven’t exactly brought their views on the timing that much closer to the central bank’s guidance.
• “The market will need to be reminded again and again of the Fed’s commitment” to support the recovery, said Anne Mathias, global rates and currencies strategist at Vanguard Group Inc. “If higher yields don’t slow the economy down, don’t upset the stock market, don’t upset risk-taking, then the Fed doesn’t need to push back hard against them,” she said in an interview.
• Current rates-market pricing reflects a lingering conviction that the pace of the recovery will spur the Fed to action, earlier than it anticipates, though Chair Jerome Powell reiterated Wednesday that the Fed needs to see “substantial further progress” on its employment and inflation goals before thinking about a hike.
• That statement helped short-end rates fall. Seven-year yields remained elevated, however, which suggests positioning for higher interest rates may be building further out the curve. A later rate hike could force the central bank to move faster to tame inflation.
• Market gauges of inflation expectations imply some faith in the central bank’s ability to keep it under control. The five-year breakeven rate, which is derived from the difference between yields on Treasuries and their inflation-protected counterparts, is around the highest since 2008, at 2.63%. That compares with a lower 10-year breakeven rate showing price pressures returning to the Fed’s target over the decade.
• That chimes with the Fed’s guidance, in Mathias’s view.
• “We’re going to see some interim inflation pressure from pent-up spending,” she said. “Net-net, though, the overall secular forces that have kept inflation at bay have not changed.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $1.8 billion.  New issuance for the week was $3.0 billion and year to date issuance is at $75.4 billion.

  (Bloomberg)  High Yield Market Highlights

• The U.S. junk bond market is wrapping up the slowest week for issuance this year with just $3 billion of debt sold so far, and no deals as yet slated to price Friday. Average yields, meanwhile, have bounced off all-time lows reached earlier this week.
• As new issuance slowed, investors piled billions of dollars into offerings that did come to market even as high-yield funds saw an outflow this week
• February issuance volume is running at almost $25b, about $5b away from the total amount sold in the same month last year, according to data compiled by Bloomberg
• CCCs, the riskiest junk bonds, have accounted for 25% of bond sales this month. Issuers have ranged from energy firms to covid-hit borrowers from the travel, leisure and entertainment sectors
• Average junk bond yields rose 3bps to 3.99% Thursday, but are still just 10bps off the record low set earlier this week
• The broader index posted a loss of 0.05% on Thursday, the second consecutive session of negative returns, and the biggest one-day loss in three weeks

(Bloomberg)  BB Junk-Bond Yields Drop Below 3% for the First Time Ever

• The average yield on U.S. junk bonds in the Double-B tier dropped below 3% for the first time ever on Tuesday as investors continue to pile into an asset class historically known for its high yields.
• The average yield on BB debt, the safest of junk bonds, fell 7bps to a record low of 2.98%, according to Bloomberg Barclays index data
• The measure for the broader U.S. Corporate High-Yield index dipped to 3.89%, down 7bps in the biggest one-day decline in about seven weeks, the data show
• CCC yields also fell to a new low of 6.11% amid calls from some credit strategists to selectively buy the riskiest of junk bonds to boost returns
• There is “no reason to be bearish” and cash levels are down to just 3.5%, an eight-year low, Bank of America wrote in the report based on a survey of global fund managers
• More borrowers are expected to sell new debt to take advantage of cheap borrowing costs and strong demand from investors
• CCC debt has gained 1.19% in February, and 2.69% since the start of the year, beating all other rating buckets in the junk bond market
• The broad junk index has gained 1.02% month-to-date and 1.36% year-to-date
• The rally may continue with oil closing at a 13-month high near $60as a winter storm halts a third of U.S. crude output

(Wall Street Journal)  Saudis Plan to Reverse Oil Cuts as Prices Rise

• Saudi Arabia plans to increase its oil output in the coming months, reversing a recent big production cut, advisers to the kingdom said, a sign of growing confidence over an oil-price recovery.
• The world’s largest oil exporter surprised oil markets last month when it said it would unilaterally slash 1 million barrels a day of crude production in February and March in an effort to raise prices.
• But the kingdom plans to make public a reversal of those cuts when a coalition of oil producers meet next month, the advisers said, in light of the recent recovery in prices. The output rise won’t kick in until April, given the Saudis already have committed to stick to cuts through March.
• The advisers cautioned the plans still could be reversed if circumstances change, and the Saudis’ intention hasn’t yet been communicated to the Organization of the Petroleum Exporting Countries, the people and OPEC delegates said.
• “We are in a much better place than we were a year ago, but I must warn, once again, against complacency,” Prince Abdulaziz bin Salman, the Saudi energy minister, said at a conference on Wednesday. “The uncertainty is very high, and we have to be extremely cautious.”
• “A Saudi increase in production. . .makes perfect sense given the tightness that is starting to emerge in the market,” said Ole Hansen, head of commodity strategy at London-based Saxo Bank. “The market will probably take it quite well.”
• The planned Saudi move to restore supplies isn’t expected to immediately spark large output increases from other big producers, analysts said, given the kingdom is acknowledged to have carried the biggest burden in reducing production.
• However, analysts do expect compliance with output curbs among producers to be increasingly loose as the recovery gains momentum.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at -$0.1 billion.  New issuance for the week was $15.1 billion and year to date issuance is at $72.3 billion.  

(Bloomberg)  High Yield Market Highlights 

• In terms of issuance, this has been the second busiest week of the year, according to data compiled by Bloomberg. With yields at record lows, more borrowers are expected to hit the market after the long weekend.
• High-yield funds returned to outflows for the week, following an inflow of $1.34b last week
• Investors are still buying new issues in droves, and the risky debt is headed for its second straight week of positive returns
• The Bloomberg Barclays U.S. Corporate High-Yield index yield held steady at a record low of 3.95% on Thursday
• A strong technical backdrop and improving fundamentals could drive spreads even tighter in the short term, Barclays Plc credit analysts led by Brad Rogoff wrote in a note Friday
• A roster of formerly distressed companies have sold notes this week and CCCs, the riskiest junk bonds, accounted for about 19% of total bond sales, the data compiled by Bloomberg show
• CCC yields rose to 6.19%, just 3bps off an all-time low of 6.16% 

(Bloomberg)  U.S. Junk-Bond Yields Drop Below 4% for the First Time Ever 

• The average yield on U.S. junk bonds dropped below 4% for the first time ever as investors seeking a haven from ultra-low interest rates keep piling into an asset class historically known for its high yields.
• The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday evening, making it six straight sessions of declines.
• Yield-hungry investors have been gobbling up junk bonds as an alternative to the meager income offered in less-risky bond markets. Demand for the debt has outweighed supply by so much that some money managers are even calling companies to press them to borrow instead of waiting for deals to come their way. A majority of new issues, even those rated in the riskiest CCC tier of junk, have been hugely oversubscribed.
• The lower yields should encourage more speculative-grade companies to tap the market after raising more than $7 billion last week. January was a record month for sales with $52 billion priced.
• Buyers have been snapping up CCC graded issues as yields for that slice of high yield also decline. They dropped to 6.21% on Monday, also a record low, and have outperformed the rest of the market for three consecutive months, according to data compiled by Bloomberg.
• Issuance conditions have been so conducive that some of the riskiest types of transactions come to market, such as bonds that are used to fund dividends to a company’s owners and so-called pay-in-kind bonds that allow a borrower to pay interest with more debt.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.5 billion and year to date flows stand at $0.8 billion.  New issuance for the week was $13.3 billion and year to date issuance is at $57.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bond yields hit a new all-time low of 4.09%, while funds that buy the risky debt saw their first weekly influx of cash this year. Great Western Petroleum could be the latest energy company to benefit from the wide-open market, looking to clear out near-term maturities and land a higher credit grade with a debt sale that’s due Friday.
• The high-yield market is headed for the biggest gains in a little more than two months, according to data compiled by Bloomberg, and yields may fall further with credit risk lower, and stock futures advancing after the U.S. Senate voted to adopt a budget blueprint for a $1.9 trillion stimulus package
• The market’s also getting a boost from rising oil prices, which climbed close to $60 a barrel
• Investors poured money into high-yield funds for the week. It follows four straight weeks of outflows
• Investors are snapping up debt in the riskiest CCC tier that’s notched up gains of more than 2% already this year. Yields on the debt have plunged to 6.48%, just 6bps off the record low of 6.42%
• “Stressed credits have historically been a good place to look for strong returns,” Barclays Plc credit analysts led by Brad Rogoff wrote in a note Friday
• In the primary market, more than a third of sales this week have been deals with ratings in the CCC bucket.
• Average junk-bonds have gained 0.56% this week, the best in about two months
• BB yields closed at a new all-time low of 3.16%
• CCCs posted gains of 0.2% on Thursday, the best asset in the high yield market. It is set to post gains of 0.67% for the week

(Bloomberg)  Credit Upgrade Cycle Is in Full Swing Amid Signs of Recovery

• As the U.S. economy shows more signs of recovering from the worst of its pandemic doldrums, the credit upgrade cycle is in full force.
• Junk companies are seeing their ratings increased in droves, with upgrades so far this quarter reaching the highest level relative to downgrades since the end of 2013, according to data for the U.S. compiled by Bloomberg. That’s a big about-face from last year, when the pandemic weighed on companies’ profits and triggered a near unprecedented rate of downgrades.
• With governments in the U.S. and Europe providing extensive support to the economy, low interest rates boosting the money supply, and signs of an improving economy, there’s a wave of upgrades happening now, according to Christina Padgett, head of leveraged finance research at Moody’s.
• Companies are refinancing shorter-term loans they got at the height of the pandemic and turning them into longer-term obligations, which is also a positive sign, she said. Boeing Co., which Moody’s rates at Baa2 or the second-lowest investment-grade level, sold $9.825 billion of bonds Tuesday, refinancing some of the $13.8 billion loan it drew down at the beginning of the Covid-19 outbreak.
• “We do see light at the end of the tunnel,” said Padgett in an interview. “The economy both in the U.S. and Europe will grow materially this year.”
• U.S. initial jobless claims fell last week to the lowest level since the end of November, a signal that job cuts are starting to slow as Covid-19 infections ebb, according to a report on Thursday.
• Even with economic improvement, junk-rated companies still face trouble, including the higher debt loads many of them now bear, said Moody’s Padgett. Shedding those obligations could be difficult.
• “If you were very levered going into the downturn, it is going to be much harder to exit with a sustainable capital structure,” she said.
• Ratings firms may have been too quick to downgrade in the first place, Bank of America Corp. credit strategists led by Hans Mikkelsen wrote on Wednesday.
• “Rating agencies overreacted to the Covid-crisis when downgrading investment-grade companies during the first part of 2020, and to compensate there will be an upgrade cycle this year,” Mikkelsen wrote.
• The number of companies facing near-term potential downgrades, among issuers rated AAA to B-, dropped for the fifth consecutive month to 1,178 on Dec. 25, from a historic high of 1,365 in July, S&P Global Ratings said in a report Tuesday. The downgrade risk among non-financial companies, however, remains elevated this year, with airlines as a vulnerable industry.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at -$0.3 billion.  New issuance for the week was $16.7 billion and year to date issuance is at $32.9 billion.

 (Bloomberg)  High Yield Market Highlights

• Yields on CCC debt, the riskiest of junk bonds, have hit an all-time low of 6.42% as investors seek bigger returns by moving down the credit curve. US LBM Holdings is the latest borrower to reap rewards from that chase, receiving more than $2.5 billion of demand for a $400 million pay-in-kind bond with ratings in the CCC tier to fund a dividend to Bain Capital.
• The recent CCC tightening has been driven by bond-level performance rather than shifts in the index constituents, Barclays Plc credit strategists led by Brad Rogoff wrote in a note Friday
• There is still room for higher-beta credits to compress, but investors should be selective given some continued Covid-related weakness.
• The CCC index has rallied for 20 straight sessions to post gains of 0.17% on Thursday, and has outperformed other parts of junk for about 11 weeks, according to data compiled by Bloomberg
• Yields on the broader junk bond index also dropped to a record low of 4.10%, though the rally may stall with credit risk higher, stock futures falling and oil prices lower amid renewed fears that the spread of coronavirus may force more lockdowns
• S. high-yield funds reported an outflow for week, the third straight week of exits, but new issues are still being inundated with demand
• The market stands about $2.5b away from making this month the busiest January ever as companies continue to churn out debt offerings to meet voracious demand

(CNBC)  IEA cuts 2021 oil demand outlook

• The IEA said it now expects world oil demand to recover by 5.5 million barrels per day to 96.6 million this year. That reflects a downward revision of 0.3 million barrels from last month’s assessment.
• The report comes as countries continue to implement strict public health measures in an attempt to curb virus spread, with lockdowns imposed in Europe and parts of China.
• Oil prices have rallied in recent weeks, supported by optimism over Covid vaccine rollouts and a surprise oil production cut from OPEC kingpin Saudi Arabia.
• “The global vaccine roll-out is putting fundamentals on a stronger trajectory for the year, with both supply and demand shifting back into growth mode following 2020′s unprecedented collapse,” the IEA said in its closely-watched report.
• “But it will take more time for oil demand to recover fully as renewed lockdowns in a number of countries weigh on fuel sales,” it added.

(New York Times)  Biden Cancels Keystone XL Pipeline and Rejoins Paris Climate Agreement

• President Biden on Wednesday recommitted the United States to the Paris climate agreement, the international accord designed to avert catastrophic global warming, and ordered federal agencies to start reviewing and reinstating more than 100 environmental regulations that were weakened or rolled back by former President Trump.
• Biden has elevated tackling the climate crisis among his highest priorities.
• “We’re going to combat climate change in a way we have not before,” Mr. Biden said in the Oval Office on Wednesday evening, just before signing the executive orders. Even so, he cautioned: “They are just executive actions. They are important but we’re going to need legislation for a lot of the things we’re going to do.”
• Also on Wednesday, Mr. Biden rescinded the construction permit for the Keystone XL oil pipeline, which would have transported carbon-heavy oil from the Canadian oil sands to the Gulf Coast. Earlier in the day, TC Energy, a Canadian company, said that it was suspending work on the line

(CAM Note)  As we go to print, the WTI crude oil price is down 2.5%.