Category: Insight

22 Jan 2021
High Yield Weekly 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 -$0.3 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%.

22 Jan 2021
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads are looking likely to finish the holiday shortened week with little change.  The Bloomberg Barclays US Corporate Index closed on Thursday January 21 at 94 after closing the week prior at 94.  Treasuries have hardly moved this week and are currently less than 2 basis points lower since last Friday.  Through Thursday, the corporate index had posted a year-to-date total return of -1.22%.

The high grade primary market saw reasonable volume during the week that was right in line with concensus expectations.  Over $25bln priced during the week.  Year-to-date issuance stands at $100.3 billion.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of January 14-20 were +$7.7bln which brings the year-to-date total to +$22.7bln.

 

08 Jan 2021
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights 

  • Urban One Inc. is slated to sell an $825 million seven-year note Friday, which would push issuance this week to about $8 billion. The junk bond primary has been dominated by energy companies, and more deals could emerge with oil prices rallying.
  • Energy companies have accounted for more than 60% of the issuance volume this week, fueled by rising oil prices and a drop in energy index yields to below 6% for the first since January 2018, according to data compiled by Bloomberg
  • Brent crude topped $55 a barrel, while West Texas Intermediate rose above $51, its highest since February 2020
  • The energy index returned 0.39% Thursday, and has gained for 11 straight sessions
  • Broader junk bond yields closed at 4.17%, and spreads at +350bps. Spreads were at a new 10-month tights, and yields were just 1bp above the all-time low yield of 4.16%
  • Barclays Plc credit strategist Brad Rogoff expects the risk rally to continue as “the probability of increased fiscal support will continue to outweigh any concerns on potentially higher corporate taxes”


(Wall Street Journal)  Saudis to Cut Output In Bid to Lift Oil Price 

  • Saudi Arabia said it would unilaterally cut one million barrels a day of crude production starting next month, a surprise move signaling the kingdom’s worry that a resurgent coronavirus is threatening global economic recovery.
  • The announcement Tuesday came after Riyadh agreed earlier in the day with other big producers to keep the group’s collective output flat, after a now-monthly assessment by the Saudi-led OPEC cartel and a group of big producers led by Russia. In that deal, the two groups, collectively called OPEC-plus, agreed to a complex deal to hold production broadly unchanged from current levels.
  • Oil prices, which had already risen sharply on news of the OPEC-plus deal, soared on the Saudi announcement. In early-afternoon trading Tuesday, West Texas Intermediate futures, the U.S. benchmark, were up 5.2% a barrel, passing through the $50 mark for the first time since last February.
  • Saudi Energy Minister Abdulaziz bin Salman said the unilateral move was made “with the purpose of supporting our economy, the economies of our friends and colleagues, the OPEC-plus countries, for the betterment of the industry.”
08 Jan 2021
Insight, Investment Grade Quarterly Josh Adams - Portfolio Manager 0 comment

Q4 2020 INVESTMENT GRADE COMMENTARY

Investment grade corporate bonds rode a roller coaster in 2020 so it should be no surprise that, after peaks and valleys, spreads finished the year nearly right where they started. The option adjusted spread (OAS) on the Bloomberg Barclays US Corporate Bond Index opened the year at 93, but soon thereafter, pandemic induced uncertainty gave way to panic stricken selling, sending the OAS on the index all the way out to 373 by the third week of March– its widest level since 2009, during the depths of The Great Recession. On March 23, the Federal Reserve announced extensive measures to support the economy and liquidity within the bond market and spreads reacted in kind, grinding tighter. There were pockets of volatility along the way, but absent a few hiccups it has been a one-way trade of tighter spreads since the end of March, with the OAS on the index finishing 2020 at 96; a mere 3 basis points wider on the year.

Lower Treasuries were the biggest driver of performance for credit during the year. The 10yr Treasury opened 2020 at 1.92% and closed as low as 0.51% at the beginning of August before finishing the year at 0.91%. The Corporate Index posted a total return of +3.05% during the fourth quarter and a full year total return of +9.89% for 2020. This compares to CAM’s gross quarterly total return of +1.86% and full year gross return of +8.73% for 2020.

2020 Investment Grade Returns – What Worked & What Didn’t?

The big winner in 2020 was duration, with lower rates leading to higher prices for bonds, all else being equal. Although the Corporate Index was up almost 10% for the year, excess returns, which measure the performance of corporate credit excluding the benefit of lower Treasury rates, were modest. The sectors that posted the best excess returns in 2020 were Basic Industry, Technology and Financials. At the sector level, Energy was the worst performer with an excess return of -5.97%, with particular underperformance for Independent Energy, which as an industry posted a 2020 excess return of -11.27%. Also at the industry level, Airlines predictably underperformed, with a 2020 excess return of -8.91%.

What to Expect in 2021?

With equity indices at all-time highs and yields on corporate bonds at all-time lows, where do we go from here? In our opinion, the theme for 2021 should be one of guarded optimism. Vaccinations have been approved and are being administered and there are more in the pipeline. Healthcare providers have become more adept at managing care and therapeutic treatments are more readily available. The policy response from the Federal Reserve has been strong and the Fed stands ready and willing to lend more support if it is needed.

As far as investment grade bonds are concerned, we expect a transition to occur as we enter 2021 and that the script will flip from 2020’s broad based risk rally to more of a credit pickers environment in 2021, where bottom up fundamentals become more important and investment managers must carefully evaluate the risks and potential rewards for each individual position within a portfolio. Credit spreads and Treasuries are beginning the year at levels that do not set-up well for the type of returns we experienced in 2019 and 2020, when the corporate index tallied gains of +14.54% and +9.89%, respectively. But outsize returns over short time horizons are not the best case for owning investment grade corporate bonds. Advisors and clients that we talk to favor investment grade corporate bonds for their low volatility, the diversification benefit they provide to an overall portfolio or their ability to generate income in a safer manner than relatively more risky asset classes. These traits are magnified over longer time horizons and thus the asset class lends itself to being more strategic in nature as an allocation within a portfolio.

As we turn the page to the New Year we see several factors that could lend support to credit spreads in 2021.

  • Lower New Issue Supply in 2021 – Investment grade borrowers issued nearly $1.75 trillion of new debt in 2020 which shattered the previous record by 58%i. Bond dealers are expecting as much as $1.3 trillion of issuance in 2021, but most estimates are falling around $1.1 trillion. Even at the high end of the estimated range, the expectation is for substantially less supply. Demand overwhelmed supply the last several months of 2020 as evident by oversubscribed order books and narrow new issue concessions (the extra compensation/yield that issuers use to compensate investors in order to entice them to buy their new bonds versus their existing bonds). An environment with excess investor demand is supportive of spreads in the secondary market.
  • It’s Just Math: Global Edition – Even though US nominal yields are low, they are still meaningfully higher than foreign investors can find elsewhere. There was $17.8 trillion in negative yielding debt around the globe at the end of 2020ii. The following developed countries had negative 10yr sovereign bonds at conclusion of the year: France, Germany, Netherlands, and Switzerland. Sweden had a 10yr yield at year end of 0.009% and Japan was at 0.013%. Simply put, foreign investors have very few options, and many, such as pensions and insurance companies, must generate a return by investing in high quality assets. The U.S. investment grade credit market is the largest, deepest and most liquid bond market in the world by an order of magnitude. There is some nuance at play here in that these investors must account for hedging costs and that can cause demand to ebb and flow at times but they will remain an important fixture in our market for the foreseeable future and their demand is a technical tailwind for spreads.
  • Improving Economy – We expect that the economy will see solid improvement in 2021 but that it will be highly industry/company specific. Some industries are still significantly impaired, and some will be impaired permanently. There will be some opportunities in industries that are facing temporary headwinds. As earnings recover it will be important for an investment manager to differentiate among those companies who will use the earnings recovery for balance sheet repair versus those who may choose to engage in M&A, shareholder rewards or adopt a more aggressive financial policy by operating with higher leverage.
  • Yields are Low, but Curves are Steep – Of particular importance to an intermediate manager like CAM, is the steepening that we have seen in the 5/10 Treasury curve. If you are a repeat reader, you know that we are interest rate agnostic and that we typically buy 8-10yr bonds and allow those bonds to roll down the curve to 4-5yrs before we sell and redeploy the proceeds back out the curve. The 5/10 curve ended the year at 55 basis points which was near its highest levels of the year, after averaging less than 35 basis points during 2020. For context, the 5/10 curve closed above 30 on only one day for the entire two year period from the beginning of 2018 to the end of 2019. A steeper curve allows for more attractive extension trades and offers better roll-down potential for current holdings. It is a mechanism that allows a manager to generate a positive total return despite a low rate environment.

Like any investment process, there are risks to our view as well.

  1. Inflation – We think that 2021 will be a year that is rife with inflation scares and that it could lead to volatility in Treasuries and corporate bond valuations. In fact, the first trading day of 2021 generated a headline as the 10yr breakeven rate surpassed 2% for the first time in over 2 yearsiii. The breakeven rate implies what market participants expect inflation to be in the next 10 years, on averageiv. We do think that we will see inflation in 2021 but that it will be isolated pockets of higher prices confined to specific sets of circumstances. We have already seen this happen for some goods, such as lumber and building materials and we expect to see the same when demand increases for items like airline travel and indoor dining. The official definition of inflation, however, is a broad based and sustainable increase in prices. The U.S. consumer has been resilient, but consumer spending has been biased toward upper middle class and high income households who have been less affected financially by the pandemic. The overall unemployment rate remains high at 6.7% and it is significantly worse for those workers with lower educational attainment. The unemployment rate for those 25 years and over with less than a high school diploma is 9% and those with a high school diploma and no college is 7.7% while those with a bachelor’s degree or higher have a 4.2% unemployment ratev. In our view, without a more complete recovery across the entirety of the labor market, it is unlikely that the economy will experience significant inflation.
  2. Slower Economic Recovery – Risk assets are at all-time highs and it appears that good news surrounding vaccines and economic recovery is fully priced as far as valuations are concerned. This leaves little room for error if expected outcomes do not meet lofty expectations. Domestically, the initial vaccine rollout fell short of its goal, having administered only 4.2 million doses by year end versus a target of 20 millionvi. The scientific community is also concerned with new variants of Covid-19, with the UK strain having recently been identified in the U.S.vii and some epidemiologists’ are questioning vaccine efficacy on a newly identified strain found in South Africaviii. We are also concerned about the lingering economic impact that the pandemic may have on small business. While small business optimism has rebounded smartly from the depths of the crisis, many of these firms do not have the financial wherewithal to survive a more prolonged recoveryix.

CAM’s Portfolio Positioning

Our investment strategy has remained consistent in its approach, with a focus on bottom-up fundamentals. It was a challenging year that required constant adaptation to market conditions and the investable opportunity-set at any given point in time. In March and April, we were extremely involved in the new issue market, as concessions rose and high quality borrowers tapped the market to shore up their balance sheets. We were also able to invest in shorter maturities as forced selling caused dislocation across corporate credit curves creating opportunities to buy shorter bonds at yields that were equal or greater to longer maturities. As market conditions normalized throughout the second half the year, we took a more balanced approach between the new issue market and the secondary market. Our focus remained biased toward higher quality credit and sectors of the market that were less levered to the re-opening of the economy and those industries that benefited from more work and leisure time spent at home. As we head into the first quarter of 2021 we continue to favor companies with strong balance sheets and stable credit metrics as the entire market has continued to rally into the New Year. As spreads and yields compress, the incremental compensation afforded from taking additional credit risk has skewed risk-reward to the downside. The “buy the dip” trade has played out in our view and we are scrutinizing the capital allocation strategies of each of the companies in our portfolio. 2021 could be the year were there is a more clear bifurcation between those companies who will exit the pandemic stronger and those who will languish because the business is saddled with too much leverage and unable to effectively compete in the marketplace. As always, preservation of capital will continue to be at the forefront of our decision process.

We wish you a happy, healthy and prosperous New Year. Thank you for your business and continued interest.

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.

i Bloomberg, December 15, 2020 “Freeze to Frenzy, Corporate Bonds Bounce Back”
ii Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value USD
iii Bloomberg News, January 4, 2021”Treasuries Inflation Gauge Exceeds 2% for First Time Since 2018”
iv Federal Reserve Bank of St. Louis (T10YIE)
v U.S. Bureau of Labor Statistics, December 4, 2020 “Employment status of the civilian population 25 years and over by educational attainment”
vi The Hill, January 4, 2021, “Operation Warp Speed chief adviser admits to ‘lag’ in vaccinations”
vii The Wall Street Journal, January 4, 2021, “Highly Contagious Covid-19 Strain Has Been Found in New York State, Gov. Cuomo Says”
viii Bloomberg, January 4, 2021, “South African Covid Strain Raises Growing Alarm in the U.K.”
ix NFIB, December 8, 2020, “NFIB Small Business Economic Trends – November”

08 Jan 2021
High Yield Quarterly, Insight Rich Balestra - Portfolio Manager 0 comment

2020 Q4 High Yield Quarterly

In the fourth quarter of 2020, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 6.45% bringing the year to date (“YTD”) return to 7.11%. The CAM High Yield Composite gross total return for the fourth quarter was 4.78% bringing the YTD return to 7.51%. The S&P 500 stock index return was 12.14% (including dividends reinvested) for Q4, and the YTD return stands at 18.39%. The 10 year US Treasury rate (“10 year”) had a steady upward slope throughout the quarter. The rate finished at 0.91%, up 0.23% from the beginning of the quarter. During the quarter, the Index option adjusted spread (“OAS”) tightened 157 basis points moving from 517 basis points to 360 basis points. During the fourth quarter, each quality segment of the High Yield Market participated in the spread tightening as BB rated securities tightened 118 basis points, B rated securities tightened 161 basis points, and CCC rated securities tightened 293 basis points. Take a look at the chart below from Bloomberg to see a visual of the spread moves in the Index over the past five years. The graph illustrates the speed of the spread move in both directions during 2020.

The Energy, Transportation, and Financial sectors were the best performers during the quarter, posting returns of 13.43%, 10.87%, and 8.72%, respectively. On the other hand, Insurance, Technology, and Utilities were the worst performing sectors, posting returns of 3.61%, 3.69%, and 4.14%, respectively. At the industry level, oil field services, integrated oil, REITs, and metals & mining all posted the best returns. The oil field services industry posted the highest return (25.94%). The lowest performing industries during the quarter were health insurance, cable, building materials, and wireless communications. The health insurance industry posted the lowest return (2.74%).

The energy sector performance has bounced around this year moving from a top performer to a bottom performer and is once again a top performer to close out the year. As can be seen in the chart to the left, the price of crude has been fairly stable in the second half of the year compared to the first half. Currently, OPEC+ members are meeting to determine oil production moving forward. It appears that Russia is looking fairly isolated as one of the only members in support of a supply boost. According to a post by Javier Blas, Bloomberg’s Chief Energy Correspondent, the Saudis are looking to push the price per barrel north of $50. In the current environment, a supply boost is not congruent with such an objective.

During the fourth quarter, the high yield primary market posted $104.5 billion in issuance. Many companies continued to take advantage of the open new issue market, and 2020 finished with a record $442.3 billion in issuance. Issuance within Consumer Discretionary was the strongest with approximately 23% of the total during the quarter. Consumer Discretionary also had the most issuance in the second quarter and third quarter. Therefore, it showed the most issuance for the year with approximately 23% of the total and far surpassed second place Communications with approximately 15% of the total.

The Federal Reserve maintained the Target Rate to an upper bound of 0.25% at both the November and December meetings. The big news during the quarter was Treasury Secretary Mnuchin’s move to end a handful of lending programs that were rolled out in response to the pandemic. Naturally, there was much political wrangling over the move. Fed Chair Powell went on record to say that while the Federal Reserve had a desire to have more lending programs at their disposal than less, the Treasury and Mnuchin had the legal authority to make the call on the programs in question. At any rate, Congress finally passed an additional stimulus bill. Furthermore, there is little doubt that if the financial markets begin to have liquidity issues like those experienced earlier in 2020, the Treasury, Federal Reserve, and Congress will quickly push forward in an attempt to alleviate the issues.
Intermediate Treasuries increased 23 basis points over the quarter, as the 10-year Treasury yield was at 0.68% on September 30th, and 0.91% at the end of the fourth quarter. The 5-year Treasury increased 8 basis points over the quarter, moving from 0.28% on September 30th, to 0.36% 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 economic reports were very noisy over the course of 2020. The revised third quarter GDP print was 33.4% (quarter over quarter annualized rate) up from the revised second quarter GDP print of -33.2% Looking forward, the current consensus view of economists suggests a GDP for 2021 around 3.9% with inflation expectations around 2.0%.i

Being a more conservative asset manager, Cincinnati Asset Management Inc. remains structurally underweight CCC and lower rated securities. This positioning generally served our clients well in 2020. However, the lowest rated segment of the market outperformed in the fourth quarter. Thus, our higher quality orientation was not optimal during the period. As noted above, our High Yield Composite gross total return did outperform the Index over the year-to-date measurement period. With the market so strong during the fourth quarter, our cash position was a large drag on overall performance. Additionally, our credit selections within the consumer non-cyclical sector were a drag on performance. Within the energy sector, our higher quality selections were considered a negative to relative performance as the riskiest segment of the sector performed extraordinarily well. Benefiting our performance were our underweight in the communications sector and our credit selections in the finance companies sector. Further, our credit selections within the auto industry were also a positive.

The Bloomberg Barclays US Corporate High Yield Index ended the fourth quarter with a yield of 4.18%. While this yield is a new record low for the high yield market, on a spread basis, the current 360 spread is well off the record low of 232 set back in 2007. The market yield is an average that is barbelled by the CCC-rated cohort yielding 7.12% and a BB rated slice yielding 3.21%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), held a range mostly between 20 and 40 over the quarter with an average of 25. For context, the average was 15 over the course of 2019 and 29 for 2020. The fourth quarter had 8 bond issuers default on their debt. The trailing twelve month default rate was 6.17% and the energy sector accounted for roughly a third of the default volumeii. This is relative to the 3.35%, 6.19%, 5.80% default rates for the first, second, and third quarters, respectively. Pre-Covid, fundamentals of high yield companies had been mostly good and with the strong issuance during Q2, Q3, and Q4, companies have been doing all they can to bolster their balance sheets. From a technical perspective, fund flows were positive every month of the fourth quarter, and September was the only month to show an outflow since Marchiii. High yield certainly had some volatility in 2020; however, the market did ultimately provide a positive total return overcoming a very difficult Q1. For clients that have an investment horizon over a complete market cycle, high yield deserves to be considered as part of the portfolio allocation.

The 2020 High Yield Market is definitely one for the history books. The actions by the Treasury and the Federal Reserve no doubt helped to put in a bottom and provide a backstop for the capital markets to begin functioning amid the Covid pandemic. The High Yield Market was able to absorb over $200 billion in fallen angels with relative ease. This is about double the amount of fallen angels in 2009 and 12x the amount from2019iv. Generally speaking, the market has recovered. The market yield is well through the level at year end 2019, and the market spread is approaching the year end 2019 spread level. However, there are still plenty of matters on the radar that deserve attention. To that end, the ongoing rollout of vaccines and the President-elect taking office mid-January are certainly front and center. Therefore, it is important that we exercise discipline and selectivity in our credit choices moving forward. We are very much on the lookout for any pitfalls as well as opportunities for our clients. We will continue to carefully monitor the market to evaluate that the given compensation for the perceived level of risk remains appropriate on a security by security basis. It is important to focus on credit research and identify bonds of corporations that can withstand economic headwinds and also enjoy improved credit metrics in a stable to improving economy. 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 through such a historic time.

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.

i Bloomberg January 4, 2021: Economic Forecasts (ECFC)
ii JP Morgan January 4, 2021: “Default Monitor”
iii Wells Fargo January 4, 2021: “Credit Flows”
iv Barclays January 4, 2021: “US High Yield Corporate Update”

08 Jan 2021
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads will finish the week unchanged after a minor bout of mid-week volatility that pushed spreads wider for a day.  Through the Thursday close, the OAS on the Bloomberg Barclays Corporate Index was 96, which is the same level that it closed to end 2020.  Treasury rates stole the headlines from spreads this week and are higher across the board, with the 10yr up 19 basis points week over week.  The sell-off in Treasuries began ahead of the Georgia special election and accelerated after the results, as the market began to price the expectation of more stimulus and Treasury supply.  Interestingly, rates were even able to shrug off a woeful December jobs report that showed the loss of -140k jobs during the month versus the concensus estimate for an addition of +50k.  We remain concerned about the health of the labor market, elevated unemployment and its impact on the economy’s ability to grow.

The high grade primary market was back in business this week with a strong start to the year as issuers borrowed $50bln.  It will be interesting to monitor new issue supply as 2021 progresses.  There are expectations for less supply but will this hold true?  In our view it is really a question of the economy and how quickly things get back to “normal.”  If things go swimmingly, then we would expect less supply but if re-opening takes longer than expected then that would be a case for more supply as companies that are more impacted by the pandemic may need to continue to tap the new issue market for balance sheet liquidity.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of December 31-January 6 were +$8.4bln.

 

 

 

25 Dec 2020
High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

(Bloomberg)  Massive Package of Virus Relief, Federal Funding Passes Congress 

  • Congress passed the second-biggest economic rescue package in U.S. history as part of a massive year-end spending bill, concluding months of discord between Democrats and Republicans over how to address the pandemic that continues to surge across the country.
  • In addition to funding government operations for the rest of the fiscal year, the legislation will provide aid for small businesses, supplemental unemployment benefits and $600 stimulus payments to most Americans and their children starting as soon as next week. It also includes money for schools, airlines and for distribution of vaccines.
  • The Senate followed the House late Monday in passing by overwhelming margins the $2.3 trillion bill, just hours after lawmakers got their first look at the 5,593 pages of text. The White House has said President Donald Trump will sign it.
  • Economists say the aid should be enough to avert a double-dip recession next year, though risks remain and both parties expect to be wrangling over addition relief measures after President-elect Joe Biden takes office on Jan. 20. Many of the aid provisions, such as the extended jobless benefits, will expire in the first quarter of next year.
  • While the bill is smaller than many economists had anticipated months ago, it could be enough to ward off another contraction in gross domestic product.
  • “This latest fiscal rescue package will add approximately 1.5 percentage points to annualized real GDP growth in the first quarter of 2021 and close to 2.5 percentage points to calendar-year 2021 growth,” said Mark Zandi, of Moody’s Analytics. “If lawmakers had not come through, the economy probably would have suffered a double-dip recession in early 2021.”
18 Dec 2020
High Yield Weekly 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 -$0.9 billion and year to date flows stand at $48.7 billion.  New issuance for the week was $12.8 billion and year to date issuance is at $425.8 billion. 

(Bloomberg)  High Yield Market Highlights 

  • The U.S. junk bond rally is set to extend the CCC-tier’s reign as the best-performing high-yield debt to seven consecutive weeks, with the index poised to end the week with gains of 0.5%. That beats higher-quality BBs and single-Bs.
  • The CCC index has rallied for 24 straight sessions and posted gains of 0.2% on Thursday, the longest winning streak since 2011
  • The high-yield primary has cleared its calendar ahead of the holidays, pricing $2.5b yesterday to take the month’s volume to almost $30b, the busiest December since at least 2006
  • While the primary takes a break, one of the market’s top-five dealers expects more borrowers to return in the new year as the “extremely attractive” conditions should continue at least into the first quarter
  • Average January issuance over the last six years has been in the range of $20b, according to data compiled by Bloomberg
  • CCCs have accounted for 20% of the overall issuance volume this week
  • Energy dominated the primary this week, accounting for almost one-third of the supply
  • Junk bond yields rose 1bp to close at 4.41%, just 7bps off the all-time low of 4.34%. Spreads closed at +378bps, down from +379
  • The index gained for the fourth straight session, with returns of 0.09%
  • CCC yields closed at a new 6Y low of 7.37%, down 5bps, while spreads closed at fresh 2Y low of +677bpsm also down 5bps
  • The high yield market may pause as the week winds down and stock futures move sideways while oil gains to a new 10-month high

(Wall Street Journal)  Energy Agency Cuts Global Oil-Demand Forecast 

  • It will be several months before coronavirus vaccinations start to boost global oil demand, with the recovery in some of the world’s wealthy countries “going backwards” this quarter, the International Energy Agency said Tuesday.
  • In its monthly oil-market report, the IEA cut its forecast recovery in demand for 2021 by 170,000 barrels a day to 5.7 million barrels a day.
  • That included a reduction of 400,000 barrels a day to its forecast demand for the second quarter when analysts had expected the expansion of vaccination programs around the world to begin lifting economic activity.
  • The agency also lowered its demand forecast for the final quarter of 2020.
  • Demand has somewhat recovered in the second half from its 16% drop in the second quarter, but that resurgence “is almost entirely due to China’s fast rebound from lockdown,” the IEA said. But the demand outlook in the wealthy countries that make up the Organization for Economic Cooperation and Development is bleak, according to the IEA.
  • With another wave of infections prompting a return to lockdown measures in Europe, demand there in the final three months of the year is expected to be even weaker than it was in the third quarter, the agency said.
  • Expected pressure on the airline industry in 2021 was a major driver behind the IEA’s downgrades.
  • Weaker demand for jet fuel and kerosene is projected to next year account for 80% of the shortfall of 3.1 million barrels a day in overall demand compared with 2019, meaning the world in 2021 would recover only two-thirds of the demand lost this year.


(Bloomberg)  Fed to Maintain Bond Buys Until ‘Substantial’ Economy Gains Seen

  • The Federal Reserve strengthened its commitment to support the U.S. economy, promising to maintain its massive asset purchase program until it sees “substantial further progress” in employment and inflation.
  • At their final meeting of a tumultuous year, policy makers led by Chair Jerome Powell on Wednesday voted to maintain monthly bond purchases of at least $120 billion and scrapped their previous pledge to keep buying “over coming months.”
  • The Fed meeting came as lawmakers on Capitol Hill tried to wrap up an agreement on new stimulus after months of deadlock, with both fiscal and monetary policy poised to help continue cushioning an increasingly shaky economy during the wait for widespread vaccine distribution.
  • The Federal Open Market Committee said “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.” Its quarterly projections for the economy showed some improvement compared with September.
  • The committee unanimously kept the federal funds target rate in a range of zero to 0.25%, where it’s been since March, and a majority of Fed officials continued to forecast that their benchmark lending rate would be held near zero at least through 2023.
  • The FOMC “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time,” policy makers said, repeating language from their November statement.

 

 

04 Dec 2020
High Yield Weekly 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 -$0.2 billion and year to date flows stand at $48.7 billion.  New issuance for the week was $4.5 billion and year to date issuance is at $402.0 billion.

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bond yields breached record lows for the second time this year Thursday and could go even lower with credit risk falling, and stock futures and oil prices rising.
  • The average yield for the Bloomberg Barclays U.S. corporate high yield index plummeted to 4.45%, sinking below the previous record of 4.56% set on Nov. 9. That had pierced a low not seen since June 2014
  • High-yield funds reported a small outflow for the week, reversing the prior week’s inflow
  • Three borrowers priced four tranches for $1.7b on Thursday. That included a deal from AssuredPartners with ratings in the CCC tier that offered one of the lowest yields on record, according to data compiled by Bloomberg
  • The insurance broker priced $550m of 8NC3 notes at 5.625%, the lower end of talk. LifePoint Health Inc. sold $500m notes in the CCC tier at 5.375% earlier this week
  • IPL Plastics, owned by Madison Dearborn Partners, priced a $125m PIK toggle with a 9% cash coupon at 99 cents on the dollar, in line with talk. That also had CCC band ratings
  • Seagate Technology, which is rated Ba1/BB+, priced $500m 8.6NC3 notes at 3.125% and $500m 10.6NC5 at 3.375%. Both tranches priced at the tight end of talk, and proceeds will buy back stock
  • CCCs are set to outperform BBs and single Bs for the fifth consecutive week with gains of 0.99% so far, the data show
  • CCC yields fell to 7.61% Thursday, and are about 200bps lower over the month


(Bloomberg)  Biden Fills Yellen-Led Economy Team

  • President-elect Joe Biden rolled out the first set of nominations for his economic team on Monday, formally announcing his selection of Janet Yellen to be Treasury secretary, Neera Tanden to lead the Office of Management and Budget and Cecilia Rouse to head the Council of Economic Advisers.
  • Biden also announced his intent to nominate Adewale Adeyemo, a former senior adviser at BlackRock Inc., to be deputy Treasury secretary. Adeyemo is a Nigerian-born attorney and president of the Obama Foundation.
  • “As we get to work to control the virus, this is the team that will deliver immediate economic relief for the American people during this economic crisis and help us build our economy back better than ever,” Biden said in a statement.
  • If confirmed, the nominations of Yellen, Tanden and Rouse would be the first time the top three Senate-confirmed economic positions went to women. Tanden’s nomination already appeared to be in trouble with Senate Republican aides expressing opposition on Sunday even before it was formally announced.
  • Biden has also tapped two economic advisers from his presidential campaign, Jared Bernstein and Heather Boushey, to be members of the CEA.
  • Biden did not announce his pick for a key White House economic post, director of the National Economic Council. But Brian Deese, another BlackRock executive who served in the Obama administration, is likely to be offered the job, people familiar with the matter said.
  • The choices show Biden turning to experienced Washington hands as he begins building his economic team, with an eye toward racial and gender diversity.
20 Nov 2020
High Yield Weekly 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 $1.3 billion and year to date flows stand at $45.0 billion.  New issuance for the week was $11.0 billion and year to date issuance is at $387.7 billion. 

(Bloomberg)  High Yield Market Highlights 

  • The junk-bond market is having its busiest week in about two months as borrowers look to lock in low rates before the Thanksgiving holiday. Credit risk is higher Friday amid the prospect of an end to Federal Reserve backstops.
  • U.S. Treasury Secretary Steven Mnuchin requested that emergency liquidity including primary and secondary market corporate credit facilities introduced earlier in the year expire as scheduled on Dec. 31.
  • “This was unexpected by investors and will likely lead to near-term underperformance, especially in short- dated credit, where valuations were too tight to begin with,” Barclays Plc credit strategists Brad Rogoff and Shobhit Gupta wrote in a note.
  • It’s probably not negative for the long term though since the Fed has been willing to backstop credit valuations, they said. A new Treasury secretary under the new administration in January could also re-establish these facilities.
  • Issuance volume for the week was quite strong. The volume was the most since mid-September, according to data compiled by Bloomberg.
  • Average yields rose 6bps to close at 4.86% Thursday. Spreads widened 5bps to 422bps more than Treasuries.
  • The broader index posted a small loss of 0.01%, the first after four sessions of gains. The index is set to end the week with modest gains of 0.6%.
  • CCCs bucked the trend on Thursday, posting gains of 0.05% and are poised the end the week with returns of 0.86%, the best in the high-yield market.


(Reuters)  Oil up on hopes for delay to OPEC+ supply increase, vaccine 

  • Oil prices firmed on Wednesday on hopes OPEC and its allies will delay a planned increase in oil output and after Pfizer said its COVID-19 vaccine was more effective than previously reported.
  • Crude oil futures contracts jumped by about $1 after Pfizer Inc said on Wednesday final results from the late-stage trial of its vaccine showed it was 95% effective. Last week, it had put the efficacy at more than 90%.
  • Moderna Inc said on Monday that preliminary data for its vaccine also showed it was almost 95% effective.
  • “Oil prices today are modestly rising on hopes that OPEC+ will decide to postpone its planned production increase in January and on the latest vaccine euphoria,” said Rystad Energy’s head of oil markets, Bjornar Tonhaugen.
  • To tackle weaker energy demand amid a second wave of the pandemic, Saudi Arabia called on fellow members of the OPEC+ group to be flexible to meet market needs and to be ready to adjust their agreement on output cuts.
  • OPEC+, comprising the Organization of the Petroleum Exporting Countries (OPEC), Russia and other producers, met on Tuesday but made no formal recommendation before the group’s full ministerial meeting on Nov. 30-Dec. 1 to discuss policy.
  • Members of OPEC+ are leaning towards delaying the current plan to boost output in January by 2 million barrels per day (bpd), sources have said. They are considering a possible delay of three or six months.
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