Category: Insight

09 Oct 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 $4.9 billion and year to date flows stand at $46.4 billion.  New issuance for the week was $6.6 billion and year to date issuance is at $340.6 billion.

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed for the biggest weekly gains in more than two months with yields just 53bps off June 2014’s record low of 4.83% as CCCs and even lower rated pay-in-kind bonds find eager buyers.
  • The rally may extend as global equities, also on track to post their best weekly gains since July, and U.S. stock futures climb on renewed hopes of fresh stimulus
  • Investors returned to the asset class with gusto, pouring cash into retail funds after recent exits amid market volatility. U.S. high yield funds reported an inflow of $4.01b for the week ended Oct. 7, the 11th biggest on record, after pulling cash the previous two weeks
  • Issuance continued unabated this week with almost $7 billion in debt pricing
  • In keeping with the recent trend and an overall risk-on tone, demand for new issues was at least about 3x offering sizes, and even CCCs saw robust demand
  • The high-yield index posted gains of 0.2% on Thursday and is on track to see the biggest weekly gains since July. The index has seen gains for four straight sessions
  • Yields closed at 5.36%, a five-week low, and is just 53bps off the record low of 4.83%
  • Spreads closed at +474, down 5bps and also a five-week low

(CNBC)  Trump reverses course on coronavirus relief talks 

  • President Donald Trump reversed course Tuesday night and urged Congress to approve a series of coronavirus relief measures that he would sign, including a new round of $1,200 stimulus checks for Americans.
  • Earlier in the day, he had halted talks between top Democrats and Republicans until after the election, which appeared to have killed the chances of a new package.
  • “If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?” Trump tweeted Tuesday night.
  • He said in another tweet that he would approve funding for specific struggling industries, such as airlines and small businesses, which is short of what House Democrats proposed.
  • “The House & Senate should IMMEDIATELY Approve 25 Billion Dollars for Airline Payroll Support, & 135 Billion Dollars for Paycheck Protection Program for Small Business. Both of these will be fully paid for with unused funds from the Cares Act. Have this money. I will sign now!” Trump said.
  • A senior administration official familiar with the president’s thinking said Tuesday that a “large-scale stimulus package is on the sidelines,” as Trump made clear earlier, saying the president felt it best not to string people along. But the White House appears to be planning to push a series of smaller, individual packages on mutually agreed-upon items.
  • Initial coronavirus aid expired at the end of July. Current negotiations had centered on a package that would have provided another round of direct payments to Americans, enhanced unemployment benefits and money for schools, testing, small businesses and the airline industry, which has begun substantial layoffs.
  • Trump had slammed the door on a pre-election deal hours after Federal Reserve Chairman Jerome Powell said more stimulus to the economy is necessary, saying the recovery has “a long way to go.”
  • Pointing to promising recent economic developments, Powell said easing up on added relief could “lead to a weak recovery, creating unnecessary hardship for households and businesses.”
  • “By contrast, the risks of overdoing it seem, for now, to be smaller,” Powell told the National Association for Business Economics. “Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”
  • Congressional negotiators have been deadlocked for months over a new stimulus package after having passed initial relief earlier in the year. Pelosi and Treasury Secretary Steven Mnuchin had recently resumed talks, but progress had been stalled.
08 Oct 2020
Insight, Investment Grade Quarterly Josh Adams - Portfolio Manager 0 comment

2020 Q3 Investment Grade Commentary

Corporate credit turned in a solid performance during the third quarter. Spreads were tighter, with the option adjusted spread on the Bloomberg Barclays U.S. Corporate Index opening the quarter at 150 and closing the quarter at 136. Treasuries were almost unchanged on the quarter with the 10yr Treasury opening at 0.66% and closing at 0.68%, but that does not tell the whole story of the volatility that was experienced throughout the period. The 10yr closed as low as 0.51% on August 4th and as high as 0.75% on August 27th with the average coming in at 0.64%. The Corporate Index posted a total return of +1.54% during the quarter with a year-to-date tally of +6.64%. This compares to CAM’s gross quarterly total return of +1.76% and year-to-date gross return of +6.74%.

Investment Grade Bonds – Where is The Value?
We have been at this a long time and the lightning quick risk reversal we have experienced in 2020 is the type of thing that only comes around once every decade or so. Going back to March 20, the Corporate Index closed that day with a year-to-date total return of -10.58%, but quickly rebounded over +17.2% through the end of the third quarter, a period of just over 6 months from the low. In March, the risk reward for corporate credit was very attractive, especially for extremely high quality A-rated credit. The spread on the Corporate Index traded north of 370 during the spring malaise, a level not seen since the financial crisis in early 2009, which is the last time we saw such a tremendous spread rally.

Now that the market has rallied so far so fast, clients are asking about the valuation of IG credit. Some clients are even wondering if it is worth owning IG bonds at all. For most investors, it is important to remember that IG credit is but one part of a well-diversified portfolio. Most of our clients own IG credit as a way to generate income, diversify away from equities or dampen overall portfolio volatility. We think that IG credit is still attractive for a few reasons and that the asset class still has a key part to play in an investor’s overall asset allocation.

Spreads still present opportunity in our view, particularly when looking at the percentage of yield that is comprised of credit spread. Remember that there are two components of yield as a corporate bond investor: the yield of the underlying Treasury at the time of purchase and the corporate credit spread on top of that Treasury yield. For example if the purchase of a security occurred while the 10yr Treasury was 0.70% and the corporate credit spread of the security was trading at 200 basis points then the yield to maturity for that particular bond purchase would be 2.70%. In this case we would calculate the spread component of our overall yield by dividing 200/270bps arriving at a figure of 0.74%, which is very high by historical standards.

As you can see from the above charts, as the yield on the index has fallen, the percentage of yield that is comprised of credit spread has risen. This gives us two items that make us feel reasonably optimistic about the current level of spreads. If the economy is slow to recover from the pandemic, and Treasury rates remain near historical lows for an extended period, then spreads could well grind tighter, to a ratio that is more in line with the historical level of compensation relative to interest rates. On the other hand, if the economy recovers more quickly than the market currently anticipates, then we would expect a gradual increase in interest rates toward pre-pandemic levels. In the “quicker recovery” scenario, because the economy would be improving, then the path of least resistance would be tighter credit spreads which would help to offset rising interest rates. Recall that the spread on the index opened the year at 93 versus 136 at the end of the third quarter, so it is not hard to imagine tighter credit spreads from current levels amid an environment of more robust economic growth.

We are also monitoring several technical tailwinds that could be supportive of credit spreads for the remainder of 2020 and beyond. First, investor demand for corporate credit has been robust in 2020, with over $203 billion in net inflows into high grade funds through the end of the third quarteri. Second, there has been a resurgence in the foreign bid for $USD credit. The Bloomberg Barclays Global Aggregate Negative Yielding Debt Index closed September at -$15.5 trillion, not terribly far from its all-time high of -$17 trillion in August of 2019. Asia is one of the largest buyers of $USD IG credit and overnight Asian buying has been substantially positive every month for the past year and Asian demand was especially large in March, April and May of this yearii. Third and finally, we are looking for supply to slow substantially going forward. 2020 has seen a tidal wave of new issue supply as companies have been keen to meet the aforementioned investor demand with new corporate bond issuance. Through the end of the third quarter, companies had issued a record breaking $1.542 trillion in new debt, +67% ahead of 2019’s paceiii. The level of issuance has been so robust that it is unlikely to keep pace going forward as companies have largely completed their liquidity boosting and refinancing endeavors. We expect that companies in certain sectors that are more exposed to the economic slowdown will continue to tap the market for liquidity, but we do not anticipate nearly as much supply from those in less affected sectors. Not only that, but M&A activity is typically a large driver of supply, and it has dwindled to a standstill amid pandemic-related uncertainly. Of 200 IG deals in the 3rd quarter, fewer than 10 were tied to acquisitions bringing the year-to-date total to 20 acquisition-related deals versus 31 over the same time period in 2019<sup>iv</sup>. Less new issue supply often creates an environment that is supportive of credit spreads as investors must put their money to work in existing bonds.

Understanding the Risks
Opportunities are not without risk. Some risks loom large, like presidential and congressional elections that are just around the corner that will determine the direction of the country for the next several years. Risks related to the elections are less about the market as a whole and more about individual securities and how they may be impacted by things like tightening or loosening of restrictions related to climate change, financial regulation or changes at the Federal Reserve which could ultimately affect monetary policy. This is where bottom up credit research comes in. Our thorough research process and relatively concentrated portfolio means we are well aware of how current and potential investments might be impacted and we eschew those investments that are exposed to adverse outcomes. As far as the Federal Reserve is concerned, there is little worry about near term changes in policy as Chairman Jerome Powell’s term does not expire until February 2022 and the prevailing thought is that he would be nominated for an additional 4-year term by either presidential candidate.

An emerging risk for passive fixed income investors that has received little attention in our opinion is the increasing duration of the investment grade corporate bond universe. In the past decade, the Bloomberg Barclays Corporate Index has seen its modified duration increase from 6.7 to 8.7 years. Revisiting the concept of duration, all else being equal, if the duration is 8.7 years, then a 100 basis point linear increase in interest rates would yield an 8.7% loss of value for a portfolio invested in the index. Investors in passively managed index portfolios probably do not realize that they are exposed to almost 30% more interest rate risk than they were incurring for the same investment just 10 years ago.

CAM’s modified duration change over the past 10 years was unchanged at 6.2 years and CAM’s duration was 2.5 years shorter than the index at the end of the third quarter. Now, CAM’s duration did exhibit slight fluctuations over the most recent 10 years, but the average during that period was 6.4 years and the range of change over the preceding 10 years was just 0.9, less than half the index range of 2.2 years. The duration gap has clearly grown between CAM’s IG composite and the Index, especially over the past 2 years, as the Index has gradually seen its duration creep higher.

Why has the Corporate Index duration increased? Low interest rates have helped, but much of the change is driven by what we call reverse inquiry. That is, demand from long term institutional investors in the corporate bond space such as pensions, insurance companies and endowments who are extremely thirsty for yield. Company Treasury departments recognized this demand and happily obliged by issuing a higher percentage of longer term debt at rates that were attractive to the company and with enough yield to satiate the institutional investors. Debt maturing in 10 years or more now makes up one-third of the overall IG Index while debt maturing in 20 years or more has grown to 22.4%v.

Why has CAM’s duration exhibited such little change by comparison? As we have discussed many times before in these commentaries, you know exactly what you are going to get when it comes to our portfolio: intermediate maturities positioned in the 5-10 year portion of the yield curve. Rather than try and “guess” the direction of interest rates we will always position the portfolio in intermediate maturities as it has historically been the best place to be from a risk reward standpoint. For example, the 5/10 Treasury curve at the end of the third quarter was 41 basis points, or about 8.2 basis points of compensation or “roll down” per year earned from holding a 10 year security until the 5 year mark. The 10/30 Treasury curve was 77 basis points, or about 3.8 basis points of compensation per year from the 30 year to the 10 year mark. Thus the 5/10 curve was significantly steeper than the 10/30 curve, and this steepness is one of the reasons CAM favors intermediate maturities. The compensation afforded for the duration risk incurred by extending beyond 10 years does not offer good risk reward in our view. Additionally, there are corporate credit curves that trade on top of these Treasury curves and these corporate curves tell a similar story. At the end of the third quarter the average A2 rated industrial bond traded at a credit spread of +45 to the 5yr, +89 to the 10yr and +125 to the 30yr. Thus the A2 industrial 5/10 curve was 44 basis points while the 10/30 curve was 36 basis pointsvi. This illustrates that an investor was being better compensated by moving from a 5yr corporate bond to a 10yr corporate bond than they were by moving from a 10yr corporate bond to a 30yr corporate bond. The major take away from this exercise is that Cincinnati Asset Management will not speculate on interest rates. Instead, we will continue to focus on the intermediate portion of the yield curve where we can add value through our robust bottom up research process and opportunistic credit selection.

Going forward we plan to stick to our script, as disciplined investors of your hard earned capital. We thank you for your interest and support. As always, please do not hesitate to contact us with any questions.

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 Wells Fargo Securities, October 1 2020, “Credit Flows: Supply & Demand: September 24-September 30”
ii Credit Suisse, October 2 2020, “CS Credit Strategy Daily Comment (IG September Recap)”
iii Bloomberg, September 30 2020, “IG ANALYSIS US: Mondelez Brings 5th Deal, Month Cracks Top Seven”
iv The Wall Street Journal, October 3 2020, “Credit Markets: Corporate Bond Sales Reach Record”
v Deutsche Bank Research, August 18 2020, “Is Duration Risk The New Credit Risk In IG?”
vi Raymond James, October 2 2020, “Fixed Income Spreads”

08 Oct 2020
High Yield Quarterly, Insight Rich Balestra - Portfolio Manager 0 comment

2020 Q3 High Yield Quarterly

In the third quarter of 2020, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 4.60% bringing the year to date (“YTD”) return to 0.62%. The CAM High Yield Composite gross total return for the third quarter was 4.56% bringing the YTD return to 2.60%. The S&P 500 stock index return was 8.93% (including dividends reinvested) for Q3, and the YTD return stands at 5.57%. The 10 year US Treasury rate (“10 year”) had a bit of range intra-quarter. However, the rate finished at 0.68%, up 0.02% from the beginning of the quarter. During the quarter, the Index option adjusted spread (“OAS”) tightened 108 basis points moving from 626 basis points to 517 basis points. During the third quarter, each quality segment of the High Yield Market participated in the spread tightening as BB rated securities tightened 74 basis points, B rated securities tightened 103 basis points, and CCC rated securities tightened 258 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 really shows the speed of the spread move in both directions during 2020.

The Transportation, Consumer Cyclical, and Other Industrial sectors were the best performers during the quarter, posting returns of 6.71%, 6.30%, and 6.10%, respectively. On the other hand, Utilities, Energy, and REITs were the worst performing sectors, posting returns of 2.92%, 3.06%, and 3.42%, respectively. At the industry level, aerospace/defense, airlines, leisure, and retailers all posted the best returns. The aerospace/defense industry (10.41%) posted the highest return. The lowest performing industries during the quarter were oil field services, refining, wireless, and health insurance. The oil field services industry (-10.51%) posted the lowest return.

The energy sector performance did go from a top performer last quarter to a bottom performer this quarter. However, as can be seen in the chart to the left, the price of crude held a fairly tight range throughout the quarter. There was a dip in price during the first part of September due in part to an uptick in inventories and demand concerns.i OPEC is “keeping supplies near the lowest level in decades to offset an unprecedented plunge in fuel demand.”ii Worldwide, UAE has made supply cuts in order to offset the increased drilling from Venezuela, Iraq, Libya, and others. On a net basis, output was held steady last month as OPEC attempts to keep the market in balance.

During the third quarter, the high yield primary market posted a massive $126.3 billion in issuance. Many companies continued to take advantage of the open new issue market in order to boost liquidity. Issuance within Consumer Discretionary was the strongest with approximately 21% of the total during the quarter. Consumer Discretionary was also the strongest last quarter with approximately 32% of the issuance. The massive amount of issuance and top weighting dropping to 21% indicates just how broad based the issuance was this quarter. With the enormous issuance during Q2 and Q3, 2020 has already set the record for most annual issuance.iii

The Federal Reserve maintained the Target Rate to an upper bound of 0.25% at both the July and September meetings. There were two voting members that dissented at the September meeting. It is important to note that neither dissent had to do with the current policy rate level but more the messaging for the out years. In late August, the Federal Reserve announced a major policy update “saying that it is willing to allow inflation to run hotter than normal in order to support the labor market and broader economy.”iv The Fed has cut back the level of corporate bond purchases fairly dramatically over time. At the start of the program, the average daily buying was $300 million. The last week of September showed average daily buying of about $29 million. However, there is little doubt that the Fed stands at the ready to support the markets as needed.

Intermediate Treasuries increased 2 basis points over the quarter, as the 10-year Treasury yield was at 0.66% on June 30th, and 0.68% at the end of the quarter. The 5-year Treasury decreased 1 basis point over the quarter, moving from 0.29% on June 30th, to 0.28% at the end of the 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. There is no doubt that economic reports are going to be quite noisy over the balance of 2020. However, the revised second quarter GDP print was -31.4% (quarter over quarter annualized rate), and the current consensus view of economists suggests a GDP for 2020 around -4.4% with inflation expectations around 1.1%.

Being a more conservative asset manager, Cincinnati Asset Management is structurally underweight CCC and lower rated securities. This positioning has generally served our clients well so far in 2020. As noted above, our High Yield Composite gross total return has outperformed the Index over the year to date measurement period. With the market so strong during the third quarter, our cash position was the largest drag on our overall performance. Additionally, our credit selections within the consumer services industry were a drag on performance. While some of those selections contributed to a drag, our overweight positioning in the broader consumer sectors was a benefit as the recovery continued. Further, our underweight in the communications sector was a positive. Finally, our credit selections within the energy e&p and gaming industries provided an overall benefit to performance.

The Bloomberg Barclays US Corporate High Yield Index ended the third quarter with a yield of 5.77%. This yield is an average that is barbelled by the CCC-rated cohort yielding 10.10% and a BB rated slice yielding 4.39%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), held a range mostly between 20 and 30 over the quarter. For context, the average was 15 over the course of 2019. The third quarter had 12 bond issuers default on their debt. The trailing twelve month default rate was 5.80% and the energy sector accounts for almost half of the default volumev. This is up from the trailing twelve month default rate of 3.35% posted during the first quarter and down a bit from the 6.19% posted during the second quarter. Pre-Covid, fundamentals of high yield companies had been mostly good and with the strong issuance during Q2 and Q3, companies are doing all they can to bolster their balance sheets. From a technical perspective, fund flows have been robust, but there was an outflow for September. This was the first monthly outflow since March. Interestingly, the outflow was due to the ETF channel while the actively managed channel still had positive flows.vi High yield has certainly had some volatility this year; however the returns of the second and third quarters have recouped the loss sustained in the first quarter. For clients that have an investment horizon over a complete market cycle, high yield deserves to be considered in the portfolio allocation.

The High Yield Market is fairly bifurcated at this point. Therefore, the market is trading at elevated spread levels, and 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. As we go to print, the President and First Lady have tested positive for Covid-19 and an additional stimulus package is being worked out in Washington. These items among others, in addition to the election, should make the fourth quarter no less eventful than the first three quarters of 2020. 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 buy 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 an unprecedented 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 September 10, 2020: “Oil Falls With Growing U.S. Crude Supplies and Fuel Demand Fears”
ii Bloomberg October 1, 2020: “OPEC Output Steady as UAE Cut Offsets Gains in Troubled Members”
iii Bloomberg October 1, 2020: “Junk Bonds Set Another Sales Record with Busiest September Ever”
iv CNBC August 27, 2020: “Powell Announces New Fed Approach”
v JP Morgan October 1, 2020: “Default Monitor”
vi JP Morgan October 1, 2020: “High Yield Bond Monitor”

02 Oct 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 -$2.2 billion and year to date flows stand at $41.5 billion.  New issuance for the week was $3.8 billion and year to date issuance is at $334.0 billion.

 (Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds may be hit by market volatility after President Donald Trump and First Lady Melania Trump tested positive for the coronavirus. Meanwhile at least two deals are slated to be sold on Friday
  • A key gauge of credit risk is lower, while stock futures tumbled as uncertainty mounted around the U.S. presidential elections
  • Investors are already jittery, pulling over $2 billion from high-yield funds this week. This was the second straight week of withdrawals
  • Demand for new issues is showing no signs of waning with investor orders as much as three to four times the amount of debt available
  • Spreads tightened 7bps to close at an almost two-week low of 510bps more than Treasuries. Yields dropped 8bps to 5.69%
  • The index posted gains of 0.17% on Thursday, the fourth straight session of positive returns
  • CCCs have gained 1.05%, beating BBs and single Bs at 0.83% and 0.9% respectively
25 Sep 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 -$4.8 billion and year to date flows stand at $43.7 billion.  New issuance for the week was $11.2 billion and year to date issuance is at $330.1 billion.

 

(Bloomberg)  High Yield Market Highlights

  • U.S. junk bonds are headed for the biggest weekly loss since April amid fund outflows, equity volatility and concerns about the economic outlook. Most new issues have been well received by investors, but borrowers may take a step back until more stability returns.
  • Investors pulled over $4 billion from junk-bond funds during the week, the 10th biggest withdrawal on record
  • Spreads widened another 14bps Thursday. They’ve jumped 43bps since last Friday to 533bps more than Treasuries, the highest level since July 17, according to the data
  • Yields have risen 15bps to a 10-week high of 5.98%. They’ve been under pressure for six straight days, the longest losing streak since March
  • The index has lost 1.45% this week, the worst since April. Energy has lost 2.93%, the most since March
  • The primary market has still managed to absorb more than $11 billion of new issue supply this week,
  • The number of bonds trading above call prices has fallen to $37.3b outstanding from $56.8b the previous week, which could have a knock-on effect on potential refinancings
  • September volume has reached more than $44 billion to make it the fourth busiest month on record, the data show

 

(Bloomberg)  U.S. Junk Bonds Set Sales Record Amid Yield Hunt

  • U.S. high-yield bond sales reached an annual record of $329.8 billion Wednesday as companies reap the benefits of the Federal Reserve’s liquidity-boosting policies and investors grasp for yield.
  • The crush of debt offerings accelerated in April after the U.S. central bank began purchasing some high-yield bonds as part of its efforts to support the corporate credit markets.
  • Since then, issuance has eclipsed the prior annual sales record of $329.6 billion set in 2012, according to data compiled by Bloomberg.
  • Companies staring at sharp, pandemic-induced revenue declines were emboldened to borrow billions of dollars to help ride out the pandemic. Some of the most virus-battered borrowers, including airlines, hotels and even cruise operators, were able to tap investors for financing, sometimes paying double-digit coupons.
  • Now, junk-rated issuers have tilted away from securing lifelines and are instead looking to lock in lower interest rates and push out maturities on existing debt loads. The shift, coupled with support from the Fed, has forced investors to accept diminishing yields.
  • The junk market’s record year follows the U.S. investment grade bond market, which reached a new annual issuance high in mid-August. Europe’s high-yield bond sales surged in July, the busiest for that month since 2009.

18 Sep 2020
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads are slightly tighter on the week.  The Bloomberg Barclays US Corporate Index closed on Thursday September 17 at 128 after closing the week prior at 130.  Spreads have traded in a very narrow range over the course of the last month, with the OAS on the index never closing wider than 131 or tighter than 126 since the week of August 17, with numerous ups and downs within that tight range. Through Thursday, the corporate index has posted a year-to-date total return of +7.43%.  The FOMC was on the tape Wednesday, signaling that rates will remain near zero through 2023, and there was little movement in Treasuries throughout the week.

The high grade primary market was active again, with $42bln in new debt issued, though this was down considerably versus the prior week.  Next week is expected to be slightly less busy, with syndicate supply forecasts weighing in at $30-$35bln.  The pace of issuance should continue to subside as we approach quarter end.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of September 10-16 were +$4.5bln which brings the year-to-date total to +$196bln.  This was the 23rd consecutive week of inflows into the investment grade corporate bond market.

 

18 Sep 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 $0.3 billion and year to date flows stand at $48.6 billion.  New issuance for the week was $21.3 billion and year to date issuance is at $318.9 billion.

 

(Bloomberg)  High Yield Market Highlights 

  • S. junk bonds are holding up well amid heavy supply. They’re set to post gains after two weeks of losses, and the riskiest debt in the CCC tier is leading the way.
  • CCCs have returned 0.85% so far this week, the fourth week of gains. The broader index has gained 0.15%
  • Spreads have also been resilient, tightening 8bps to 488bps more than Treasuries since Friday even after the third busiest week on record for supply, according to Bloomberg
  • “Despite the lack of good news, spreads were little changed on the week and volatility remains light compared with equities,” Barclays Plc strategists led by Brad Rogoff wrote in note on Friday. This means that the market is “in a range”, he added
  • The annual supply record is in sight with just a bit more needed to topple the previous high of $329.6b set in 2012
  • New issues are drawing investor demand of more than three times the size of debt offered in many cases
  • Junk bond spreads and yields closed at +488bps and 5.48%, respectively
  • CCC spreads bucked the trend, tightening 7bps to +919bps, the lowest level since Feb. 26

 

(Barron’s)  The Federal Reserve Is Buying Fewer Junk Bonds. That Should Be Good News 

  • The Federal Reserve has taken a step back from the high-yield bond market. That isn’t necessarily bad news, Citigroup says.
  • It bought high-yield debt at a pace of $550,000 a day in August, according to Citi’s analysis of the Fed’s latest report. That is significantly slower than its peak pace of $55 million a day in mid-May.
  • The composition of the Fed’s purchases has changed in a couple of ways as well.
  • First, the central bank bought bonds directly, instead of buying exchange-traded funds that own bonds. While ETFs were the quickest way for the central bank to provide broad support to the corporate debt market, they are only a fraction of the market’s total size. So it shouldn’t be surprising that the Fed has focused its efforts on direct bond purchases instead.
  • More important, junk-rated bonds made up a smaller share of the Fed’s purchases. They made up just 1.1% of the bonds purchased during the month ended Aug. 28, down from a 2.5% share in July, Citi found.
  • “Critically, the updated report indicates the Fed has significantly reduced both the scale and scope of support for high yield,” the bank’s strategists wrote in a note.
  • “The improvements in market structure and economic performance indicate less need for continued broad-based support,” the bank’s strategists wrote. “Should conditions deteriorate over the medium term, the Fed would likely ramp purchases again.”

 

(Wall Street Journal)  Central bank signals rates near zero at least through 2023

  • The Federal Reserve pledged to support the economic recovery by setting a higher bar to raise interest rates and by signaling it expected to hold rates near zero for at least three more years.
  • In new projections released Wednesday after a two-day policy meeting, all 17 officials who participated said they expect to keep rates near zero at least through next year, and 13 projected rates would stay there through 2023.
  • The Fed’s rate-setting committee also released new guidance specifying it would maintain rates near zero until it sees evidence of a tight labor market and inflation reaches 2% “and is on track to moderately exceed 2% for some time.”
  • “They set an enormously high bar to raise rates here. That’s the bottom line,” said Roberto Perli, a former Fed economist who is now at research firm Cornerstone Macro.
  • The Fed’s meeting was its first since officials made public last month a new policy framework that abandoned officials’ longtime strategy of pre-emptively lifting interest rates to head off higher inflation rates.
  • The latest materials from the Fed revealed just how much the central bank expects to change the way it will react to improvements in the economy.
  • New economic projections, for example, showed most officials expected interest rates to stay near zero over the next three years, even if inflation reaches 2% and the unemployment falls to around 4%.
  • “These changes clarify our strong commitment over a longer time horizon,” said Fed Chairman Jerome Powell at a news conference. “I’m not looking for a big reaction right now. But I think over time, guidance that we expect to retain the current stance until the economy has moved very far toward our goals is a strong and powerful thing.”
11 Sep 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 -$0.7 billion and year to date flows stand at $50.0 billion.  New issuance for the week was $8.1 billion and year to date issuance is at $297.6 billion.

 (Bloomberg)  High Yield Market Highlights 

  • The riskiest junk bonds are outperforming in a week where valuations overall have held up relatively well amid equity market volatility. Heavy supply meanwhile is expected to carry on with about another $3 billion slated to be sold on Friday.
  • High-yield valuations have been resilient despite the stock selloff, and even in the face of a very active new issue market, Barclays Plc strategists led by Brad Rogoff wrote in a note Friday
  • After a strong run though, investors could look to swap out of unsecured bonds into secured bonds and loans within the same capital structure, adding security at a time when default rates are rising and recoveries are lower
  • A key gauge of credit risk for junk-rated firms is rising this morning, while stock futures are rebounding
  • CCCs have gained 0.08% this week, while the broader junk bond index is down 0.15%
  • While CCCs are gaining, BBs and single Bs have lost 0.3% and 0.06%, respectively
  • Junk bonds spreads were little changed at 493bps more than Treasuries, down just 1bps. Yields fell 2bps at 5.54%


(Business Wire)  Hess Announces Oil Discovery at Redtail, Offshore Guyana 

  • Hess Corporation announced another oil discovery offshore Guyana at the Redtail-1 well, the 18th discovery on the Stabroek Block, which will add to the previously announced gross discovered recoverable resource estimate for the block of more than 8 billion barrels of oil equivalent.
  • Redtail-1 encountered approximately 232 feet of high quality oil bearing sandstone and was drilled in 6,164 feet of water. The well is located approximately 1.5 miles northwest of the Yellowtail discovery and is the ninth discovery in the southeast area of the block.
  • In addition to the Redtail-1 discovery, drilling at Yellowtail-2 resulted in the discovery of additional reservoir intervals adjacent to and below the Yellowtail-1 discovery. Yellowtail-2 encountered 69 feet of high quality oil bearing reservoirs, which comprise the 17th discovery on the Stabroek Block. This resource is currently being evaluated for development in conjunction with other nearby discoveries.
  • “The Redtail-1 and Yellowtail-2 discoveries further demonstrate the significant exploration potential of the Stabroek Block and will add to the recoverable resource estimate of more than 8 billion barrels of oil equivalent,” CEO John Hess said. “Redtail is the ninth discovery in the southeast area of the block which we expect will underpin future development.”
  • The Stabroek Block is 6.6 million acres. ExxonMobil affiliate Esso Exploration and Production Guyana Limited is operator and holds 45 percent interest in the Stabroek Block. Hess Guyana Exploration Ltd. holds 30 percent interest and CNOOC Petroleum Guyana Limited, a wholly-owned subsidiary of CNOOC Limited, holds 25 percent interest.
11 Sep 2020
Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads were mixed during the holiday shortened week and look likely to finish close to unchanged or perhaps a touch wider after it is all said and done.  The Bloomberg Barclays US Corporate Index closed on Thursday September 10 at 131 after closing the week prior at 129.  The market has a firmer tone as we got to print on Friday morning, which is a day of remembrance for those that we lost on September 11, 2001.  Through Thursday, the corporate index has posted a year-to-date total return of +7.07% versus +4.74% for the S&P500.  Treasury yields fluctuated throughout the week and are looking to finish modestly lower versus the week prior.  Treasuries were not nearly as volatile as equity markets which saw a continuation of the tech-related whipsaw which developed in the latter half of last week.

To say that the high grade primary market was active this week would be an understatement, especially considering that Monday was a holiday.  Through Thursday 44 investment grade companies sold over $65 billion in new debt according to data compiled by Bloomberg.  This is a remarkably high total over the course of just 3 trading days.  Next week is expected to be busy as well with consensus estimates calling for $40bln in new supply.  It is a good time to be an issuer with attractive borrowing costs and robust demand.

According to data compiled by Wells Fargo, inflows for the week of September 3-9 were +$6.4bln which brings the year-to-date total to +$163bln.  This was the 22nd consecutive week of inflows into the investment grade corporate bond market.

28 Aug 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 $1.9 billion and year to date flows stand at $49.8 billion.  New issuance for the week was $1.8 billion and year to date issuance is at $286.1 billion.

 

(Bloomberg)  High Yield Market Highlights

  • S. junk bonds rallied in the wake of the Fed’s shift to a more tolerant approach on inflation with the lowest-rated bonds in the CCC tier leading the way.
  • The average spread over Treasuries for bonds in the Bloomberg Barclays CCC index tightened 5 basis points to 986 basis points more than Treasuries, the lowest since Feb. 27
  • CCCs have gained 1.02% this week and 1.63% month-to-date, beating single Bs for the fourth straight month and BBs for the third time since April, according to data compiled by Bloomberg
  • Junk bond investors returned to the asset class with an inflow of $1.9 billion into U.S. high yield funds for the week
  • August issuance is likely close out at almost $53b, the second-busiest month on record, as the summer lull sets in
  • September is shaping up to be a relatively busy month for junk bond sales, with at least one dealer estimating volume of $35b-$40b, higher than the usual $25b- $35b
  • Junk-bond spreads tightened 3bps to a more than two-week low of +477bps. Yields fell to 5.39%

 

(Bloomberg)   Fed Seen Holding Rates at Zero for Five Years in New Policy

  • The Federal Reserve looks likely to keep short-term interest rates near zero for five years or possibly more after it adopts a new strategy for carrying out monetary policy.
  • The new approach, which could be unveiled as soon as next month, is likely to result in policy makers taking a more relaxed view toward inflation, even to the point of welcoming a modest, temporary rise above their 2% target to make up for past shortfalls.
  • Fed Chairman Jerome Powell is slated to provide an update on the Fed’s 1-1/2-year-old framework review of its policies and practices when he speaks on Thursday to the central bank’s Jackson Hole conference, being held virtually this year because of the coronavirus pandemic.
  • At their June meeting, all 17 Fed policy makers projected that the federal funds rate they target would remain near zero this year and next. And all but two saw rates staying at that level in 2022. Officials will provide updated quarterly forecasts at their meeting next month, including for the first time projections for 2023.
  • “We’re not even thinking about thinking about raising rates,” Powell told reporters following the June meeting, in a memorable maxim that he’s repeated since.
  • Eurodollar futures aren’t currently pricing any premium for Fed rate hikes until early 2023, with a full quarter-point increase priced in toward the end of 2023. Some traders, though, have viewed this as slightly too dovish, with demand emerging for hedges against a steeper path than is currently priced in for 2023 and 2024. Some see ultra-easy monetary policy eventually spurring inflation.
  • In a sign of economic resilience, government data on Wednesday showed U.S. orders for durable goods rose in July by more than double estimates amid a continued surge in automobile demand, indicating factories will help support the rebound in coming months.
  • The Fed held rates near zero for seven years during and after the financial crisis before raising them in December 2015. Former Fed Vice Chairman Alan Blinder doubts it will be that long this time, though he adds that he would have said the same thing when the Fed first cut rates effectively to zero in December 2008.
  • “It’s perfectly conceivable it could take seven years” before rates are increased, given how difficult it’s been for the Fed to generate faster inflation, said former U.S. central bank official Roberto Perli, who is now a partner at Cornerstone Macro LLC.

 

(Bloomberg)  Powell’s Fed Shift Allows for Higher Employment and Inflation

  • Federal Reserve Chair Jerome Powell unveiled a new approach to setting U.S. monetary policy Thursday in a speech delivered virtually for the central bank’s annual policy symposium traditionally held in Jackson Hole, Wyoming.
  • The new approach will allow inflation and employment to run higher in a shift that will likely keep interest rates low for years to come.
  • Following a more than year-long review, Powell said the Fed will seek inflation that averages 2% over time, a step that implies allowing for price pressures to overshoot after periods of weakness. It also adjusted its view of full employment to permit labor-market gains to reach more workers.
  • “Maximum employment is a broad-based and inclusive goal,” Powell said. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”
  • While the new strategy doesn’t target a specific rate of unemployment broadly or for certain demographic groups, it does give the central bank flexibility to let the job market run hotter and inflation float higher before taking action.
  • Powell’s speech left the matter of how tactically they would aim for higher inflation for future Federal Open Market Committee meetings. With the new strategy in place, Goldman Sachs Chief Economist Jan Hatzius said he now expects “changes to the forward guidance and asset purchase program to come at the September” policy meeting.
  • In the new statement on longer-run goals, the Fed said its decisions would be informed by its assessment of “shortfalls of employment from its maximum level.” The previous version had referred to “deviations from its maximum level.” The change de-emphasizes previous concerns that low unemployment can cause excess inflation.
  • While expected, the announcement of the strategy shift came sooner than some thought. After first fluctuating on the news, U.S. stocks resumed their record-breaking rally and the Treasury yield curve steepened to the widest in two months as traders bet policy rates will remain locked near zero for even longer.
  • “Powell is not only saying that they will be more patient in removing the punch bowl in the future, he has changed the recipe for the punch,” said Mark Vitner, senior economist at Wells Fargo & Co. “While the timing comes slightly earlier than had been expected, the Fed is far better served to under-promise and over-deliver, or deliver earlier in this case.”
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