Category: Insight

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at -$54.8 billion.  New issuance for the week was $3.0 billion and year to date issuance is at $82.3 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed for a weekly loss to end the August rebound after a higher-than-expected inflation reading on Tuesday triggered a broad market selloff.  Yields surged to a two-month high of 8.61% after steadily rising for three straight sessions, pushing the week-to-date loss to 1.5%.
• The losses extended across ratings in the U.S. high yield market, with CCCs leading the pack with the worst week-to- date loss of 1.7%, after sliding for three consecutive sessions. Yields rose to a two-week high of 13.72% and spreads were approaching distressed levels.
• The primary market was suddenly jolted after the CPI data earlier in the week fueled concerns that the Federal Reserve may need to raise benchmark interest rate by even 100bps to tame inflation and trigger a recession.
• The primary market may pause after the Citrix debt sale was used to assess the risk appetite and clearing price levels for new debt amid rising rates and slowing economy. Nielsen Holdings and Tenneco are among the other leveraged buyouts in the queue to sell debt at some point.

(Bloomberg)  Inflation Surprise Puts Onus on Fed to Hit Brakes Even Harder

• The U.S. economy has shown surprising resilience in the face of the fastest inflation and interest-rate hikes in a generation. That means the Federal Reserve will have to stomp even harder on demand.
• What started as a pandemic-driven supply shock has morphed into widespread inflation rooted just as much in resilient demand, underscored by unexpectedly high numbers that dashed hopes price gains were ebbing. While consumers are showing some signs of slowing, they’re still largely keeping up with persistent price pressures, powered by historic wage gains.
• All told, the Fed has a much harder task on its hands than previously thought. If Americans won’t dial back spending further, odds favor the central bank becoming that much more aggressive to take more wind out of the economy’s sails with the goal of bringing inflation down.
• “It tells you that it’s going to take a longer time, and will require higher rates — and in macro language, maybe even require more demand destruction,” as in higher unemployment and slower growth, said Torsten Slok, chief economist at Apollo Management. “It raises the probability of a recession.”
• Consumer prices advanced by more than forecast in August, defying expectations for a monthly drop due to falling gasoline prices. Shelter, food and medical care were among the largest contributors to price growth, underscoring the breadth and severity of inflation with several categories posting record increases.
• “My experience with inflation is that some of the components that were very strong in today’s report, they tend to be sticky and have a lot of inertia,” like rent, said Blerina Uruci, U.S. economist at T. Rowe Price Associates. “So I would expect those to remain pretty strong in the coming months.”
• The Atlanta Fed’s so-called sticky CPI measure rose 6.1% in August from a year ago, the biggest gain in 40 years. Meantime, the Cleveland Fed’s median CPI, which excludes categories with the largest price changes, increased by the most in data back to 1983.
• Excluding the volatile food and energy categories, the so-called core CPI climbed 0.6% from July, double the median estimate in a Bloomberg survey of economists. The core measure rose 6.3% from a year ago, the first acceleration in six months and near a four-decade high, the Labor Department’s report showed.
• “The composition is even more troubling than the aggregate reading,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note. “Outside of falling gasoline prices, inflation appears to be just as hot as ever, which means that the Fed still has plenty of work to do.”
• It also means that the Biden administration and fellow Democrats have plenty of work to do, as the latest data may threaten what had been growing optimism in the party that they would hold their congressional majorities in November.
• Traders are now fully expecting the central bank to raise interest rates by another 75 basis points when policy makers meet next week, which would be the third-straight hike of that size. They’re also upping bets that officials will go bigger at their November gathering and see the tightening cycle peaking around 4.3% early next year — more than a quarter-point higher than what was projected before the CPI report.
• Chair Jerome Powell has communicated a stronger resolve to stamp out inflation since the Fed’s summit in Jackson Hole last month, signaling that the central bank is likely to keep raising interest rates and leave them elevated for a while. He’s stuck to that hawkish view and several of his colleagues also support hiking rates to a point that more clearly restricts demand.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$4.1 billion and year to date flows stand at -$48.3 billion.  New issuance for the week was $0.4 billion and year to date issuance is at $79.3 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds head toward a loss for the second consecutive week as investors pull $4.1 billion from US junk bonds for the second-biggest such withdrawal of the year on renewed concerns about recession.
• Yields surged and spreads widened across ratings for the second consecutive week, ending a rally that began in July and extended to the first two weeks of August.
• Junk bond yields rose 20bps this week to near 8%. Spreads widened 14bps to +446.
• BBs, the most rate-sensitive in the junk bond market, are moving toward a big loss in August, with month-to-date losses at 1.15% for the worst performing asset in the US high-yield market.
• BBs are on track to end with losses for the second straight week.
• CCC spreads have steadily climbed back to distressed levels widening 52bps week-to-date to +975. The index is also expected to end the week in red, with week-to-date losses at 0.78%.

(Bloomberg)  Powell Says History Warns Against Prematurely Loosening Policy

• Federal Reserve Chair Jerome Powell signaled the US central bank is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation, and he pushed back against any idea that the Fed would soon reverse course.
• “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
• He said restoring inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.
• “Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” he said.
• “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Powell said.
• Other Fed speakers in recent days have also pushed back against expectations, priced into futures markets, that the Fed would raise rapidly to a restrictive policy stance and then begin to ease.
• Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.
• Inflation according to the Fed’s preferred measure rose 6.3% for the 12-month period ending July, according to a government report released earlier on Friday , while the core measure minus food and energy rose 4.6%.
• “While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” the Fed chief told the audience.
• “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.”
• Fed officials in June projected rates rising to 3.4% by the end of this year, according to their median estimate, and 3.8% by end 2023. They will update those forecasts in September.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.1 billion and year to date flows stand at -$44.1 billion.  New issuance for the week was $4.7 billion and year to date issuance is at $78.9 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are on track to end the six-week gaining streak after steadily falling for three consecutive sessions, with a week-to-date loss of 0.67%. Yields jump 16bps week-to-date to 7.59%, rising for the first time in seven weeks and the biggest weekly leap since early July after Federal Reserve minutes noted risks from the central bank tightening more than necessary. The losses stretched across the high yield market, with CCCs headed toward its first weekly loss, falling by a modest 0.29% and snapping the four-week rally. The losses followed a three-day decline, the longest losing streak in five weeks.
• CCC yields are headed toward the biggest weekly surge since July 1, rising 28bps week-to-date to 12.51%.
• Junk bond losses accelerated after mixed signals from different FOMC voting members, causing uncertainty over the extent of rate hikes in the coming months and its impact on growth.
• The primary market saw some borrowers rush in a hurry to take advantage of the risk-on move ahead of Jackson Hole symposium next week where the Fed could reiterate that it was focused on taming inflation and the fight against inflation continues.
• The issuance volume this week totals almost $5b, the busiest since early June.
• The month-to-date supply tally was at a modest $8b, the slowest August since 2014.
• The junk bond market may extend the decline on Friday amid a broader risk-off move. U.S. equity futures sank with Treasuries after a chorus of Federal Reserve officials reiterated their resolve to continue rate hikes and traders raised tightening wagers for other major central banks.

(Bloomberg)  Fed Officials Offer Mixed Signals on Size of September Rate Hike

• U.S. central bankers offered divergent signals over the size of the next interest-rate hike, with St. Louis’s James Bullard urging another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone.
• Bullard, who is one of the most hawkish policy makers at the U.S. central bank, told the Wall Street Journal in an interview published Thursday that he favored going big again, arguing “we should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation.”
• “I don’t really see why you want to drag out interest rate increases into next year,” he said.
• The Fed in July raised the target range for its benchmark rate by three-quarters of a percentage point to 2.25% to 2.5%, following a similar-sized hike in June to cool the hottest inflation in 40 years. Officials have since signaled that either 50, or another 75 basis points, were on the table for their Sept. 20-21 meeting, depending on the data. They get fresh monthly readings on inflation and employment between now and then.
• Both Bullard and George are voters this year on the rate-setting Federal Open Market Committee. But George, who hosts the Fed’s annual policy retreat next week in Jackson Hole, Wyoming, has sounded more dovish than Bullard in recent months, after many years of being viewed as a hawk.
• She backed the July hike but dissented in June in favor of a smaller half-point increase, citing concern the larger move could stoke policy uncertainty. Her remarks Thursday continued to tilt dovish.
• “I think the case for continuing to raise rates remains strong. The question of how fast that has to happen is something my colleagues and I will continue to debate, but I think the direction is pretty clear,” she said in Independence, Missouri.
• “We have done a lot, and I think we have to be very mindful that our policy decisions often operate on a lag. We have to watch carefully how that’s coming through.”
• George also noted that the Fed was shrinking its $8.9 trillion balance sheet while raising rates, which would also help to restrain the economy. The pace of decline steps up next month to an annual pace of around $1 trillion.
• Fed officials who have spoken since the July meeting have pushed back against any perception that they’d be pivoting away from tightening any time soon. They’ve made it clear that curbing the hottest inflation in four decades is their top priority.

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.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and year to date flows stand at -$44.8 billion.  New issuance for the week was $3.5 billion and year to date issuance is at $74.7 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the sixth straight week of gains after steadily climbing in three of the last four sessions as yields plunge to a new two-month low of 7.44%. The six-week gain would be the longest winning streak in more than 18 months.  Yields are also on track to drop for the sixth consecutive week, the longest declining stretch in two years.
• The rally gained legs after strong jobs data last Friday and lower-than-expected consumer price index earlier this week eased fears of an imminent recession amid expectations that the Federal Reserve will slow down the rate-hike campaign from the aggressive 75bps hike in the last meeting.
• The market appears to be discounting negative news and focusing on the positives, Brad Rogoff and Dominique Toublan at Barclays Capital wrote on Friday.
• The gains extended across the high-yield market, with CCCs, the riskiest part of the junk bond market, poised to gain for the fourth successive week, the longest gaining streak in more than eight months. The week-to-date gains were at 1.59%, the best performing asset in the high-yield market.
• The total returns for BBs week-to-date were 0.49% and single Bs were at 1.08%.
• BB yields dropped below 6% to 5.99% and single B yields fell to a 10-week low of 7.64%.
• The rally was also partly due to technical factor, with inflows into junk bond funds looking to put money to work and a lack of supply.

(Bloomberg)  US Inflation Runs Cooler Than Forecast, Easing Pressure on Fed

• U.S. inflation decelerated in July by more than expected, reflecting lower energy prices, which may take some pressure off the Federal Reserve to continue aggressively hiking interest rates.
• The consumer price index increased 8.5% from a year earlier, cooling from the 9.1% June advance that was the largest in four decades, Labor Department data showed Wednesday. Prices were unchanged from the prior month. A decline in gasoline offset increases in food and shelter costs.
• So-called core CPI, which strips out the more volatile food and energy components, rose 0.3% from June and 5.9% from a year ago. The core and overall measures came in below forecast.
• The data may give the Fed some breathing room, and the cooling in gas prices, as well as used cars, offers respite to consumers. But annual inflation remains high at more than 8% and food costs continue to rise, providing little relief for President Joe Biden and the Democrats ahead of midterm elections.
• While a drop in gasoline prices is good news for Americans, their cost of living is still painfully high, forcing many to load up on credit cards and drain savings. After data last week showed still-robust labor demand and firmer wage growth, a further deceleration in inflation could take some of the urgency off the Fed to extend outsize interest-rate hikes.
• Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.
• Gasoline prices fell 7.7% in July, the most since April 2020, after rising 11.2% a month earlier. Utility prices fell 3.6% from June, the most since May 2009.
• Food costs, however, climbed 10.9% from a year ago, the most since 1979. Used car prices decreased.

Shelter costs — which are the biggest services’ component and make up about a third of the overall CPI index — rose 0.5% from June and 5.7% from last year, the most since 1991. That reflected a 0.7% jump in rent of primary of residence.