Category: Insight

26 Apr 2019

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

The investment grade credit market traded sideways this week as the OAS on the corporate index looks to finish relatively unchanged.  Spreads continue to remain near their tightest levels of 2019 which has been the case since mid-April.  It was a busy week for earnings and it was feast or famine for some large-cap firms.  Companies like Microsoft and Amazon produced some exceptional results while on the other hand Intel and 3M had lackluster earnings prints.  On the Treasury front, rates are lower by 3-5 basis points across the curve on the back of an economic release that showed inflation measures are slowing.

It was an extremely quiet week for corporate issuance as companies brought just $5.65bln of new corporate bonds.  Earnings blackout periods will likely continue to have an impact on issuance for the next several weeks.  $50.8bln of new corporate debt has been priced in the month of April and the year-to-date tally of new issuance is up to $371bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of April 18-April 24 were +$6.7bln, which was the second largest weekly inflow thus far in 2019. This brings YTD IG fund flows to +$97.6bln.  2019 flows to this juncture are up 3.8% relative to 2018.



(Bloomberg) A 48-Hour Reporting Delay Could Be Coming for Corporate Debt

  • The Financial Industry Regulatory Authority will likely test the market impact of delaying the disclosure of large corporate bond trades after some of the biggest investors argued that such a move would improve liquidity.
  • Finra last week proposed running a pilot program that would give traders 48 hours before having to reveal their so-called block trades to other investors. The effort would allow the industry-funded brokerage regulator, which is overseen by the U.S. Securities and Exchange Commission, to evaluate how delayed transparency might affect corporate bond trading.
  • Current rules require that block trades be reported within 15 minutes. Brokers and investment firms such as BlackRock Inc. and Pacific Investment Management Co. have long said that such rapid disclosure can make it harder for a dealer to offload securities it’s bought, because market participants know exactly what was bought and at what price.
  • The idea for the pilot was suggested by a group of industry executives that advises the SEC. The Securities Industry and Financial Markets Association, Wall Street’s biggest trade group, has expressed support for the proposed test as did JPMorgan Chase & Co. and Eaton Vance, according to Finra. At the same time, the regulator said that two market makers for exchange-traded funds have expressed concern that the changes would reduce price transparency.


(Bloomberg) Wall Street Said to Accelerate Shake-Up in Market for New Bonds

  • Wall Street is moving closer to modernizing the clubby $2 trillion market for new corporate bond issues while seeking to retain control of a lucrative business that’s being eyed by the tech sector.
  • A group of banks led by Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., has set up a company and appointed a chief executive officer to develop an electronic system for investors to request allocations of new debt, according to people familiar with the matter.
  • Other banking heavyweights including Barclays Plc, BNP Paribas SA, Deutsche Bank AG, Goldman Sachs Group Inc. and Wells Fargo & Co. have also joined the founders in backing the platform that was originally conceived more than a year ago, the people said, asking not to be identified because it isn’t public.
  • Bloomberg talked to 10 people familiar with the initiative. While many of its details are yet to be finalized, Bloomberg reported a year ago the banks plan to focus initially on U.S. investment-grade bonds.
  • The new system, dubbed Project Mars, aims to modernize the process of buying new corporate bonds, streamlining communication in a market that still relies on phone calls, instant messaging and emails to handle billions of dollars in orders from investors.
  • Investors have pushed banks for years to streamline the market and make it more transparent amid mounting frustration at current practice where they often over-order to secure a quota of bonds that’s close to what they want. Bond allocation has become a high-stakes game, as demonstrated by Saudi Aramco’s recent $12 billion deal which saw investors place orders for more than $100 billion.


(Bloomberg) Ford Shares Surge After Q1 Earnings Beat as U.S. Sales Offset Global Weakness

  • Ford Motor Co. shares were traded sharply higher Friday after the carmarker posted stronger-than-expected first quarter earnings thanks to a surge in U.S. demand for its iconic pick-up trucks that offset weakening international demand.
  • Ford said earnings for the three months ending in March rose nearly 52% from the same period last year to a forecast-beating 44 cents a share even as total revenues edged 3.9% lower to $40.34 billion as key markets in China continue to weaken.
  • S. sales, however, held steady at $25.4 billion. with healthy demand for trucks and SUVs in the company’s home market providing $2.2 billion of its overall $2.4 billion in operating earnings for the quarter.


(Bloomberg) U.S. Growth of 3.2% Tops Forecasts on Trade, Inventory Boost

  • S. economic growth accelerated by more than expected in the first quarter on a big boost from inventories and trade that offset slowdowns in consumer and business spending, bolstering hopes that growth is stabilizing after its recent soft patch.
  • Gross domestic product expanded at a 3.2 percent annualized rate in the January-March period, according to Commerce Department data Friday that topped all forecasts in a Bloomberg survey calling for 2.3 percent growth. That followed a 2.2 percent advance in the prior three months.
  • But underlying demand was weaker than the headline number indicated. Consumer spending, the biggest part of the economy, rose a slightly-above-forecast 1.2 percent, while business investment cooled. A Federal Reserve-preferred inflation measure, the personal consumption expenditures price index excluding food and energy, slowed to 1.3 percent, well below policy makers’ 2 percent objective.

(Bloomberg) Occidental’s $38 Billion Anadarko Offer Starts Permian Fight

  • After being rebuffed several times, Occidental Petroleum Corp. on Wednesday made public a $38 billion offer to buy Anadarko Petroleum Corp., seeking to break up a proposed takeover by Chevron Corp. The $76 per share cash-and-stock bid for The Woodlands, Texas-based oil and natural gas producer is 20 percent more than Chevron’s $33 billion April 12 agreement.
  • For Occidental, which has a market value of about $46 billion, the acquisition would be its largest ever and the biggest purchase of an oil producer anywhere in at least four years. It would pull together two second-tier oil and natural gas producers, as opposed to Chevron’s bid to create another “ultramajor” to rival Exxon Mobil Corp. It would require Anadarko to pay a $1 billion breakup fee to Chevron.
  • In an email, Chevron spokesman Kent Robertson said the company was “confident the transaction agreed to by Chevron and Anadarko will be completed.”
  • A tie-up would help Occidental maintain its leading position in the Permian Basin of West Texas and New Mexico, where it currently faces being overtaken by Chevron, which has ambitious growth plans for the region. The Permian is the world’s fast-growing oil major patch and has helped to turn the U.S. into a net exporter, also making it a bigger producer than Saudi Arabia.
  • Chief Executive Officer Vicki Hollub said in a Bloomberg Television interview that the offer is the same it made to Anadarko in January 2018. The company has also made three bids since late March, she said Wednesday in a letter to Anadarko’s board of directors. Occidental said it has completed its due diligence on the deal and has financing lined up with Bank of America Merrill Lynch and Citigroup Inc.
26 Apr 2019

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 $16.9 billion.  New issuance for the week was $1.2 billion and year to date HY is at $72.2 billion, which is -2% over the same period last year.


(Bloomberg)  High Yield Market Highlights

  • Gains in U.S. junk bonds have started to sputter, with the Bloomberg Barclays high-yield index poised for its weakest two-week stretch since the start of March. The oil rally, a big driver in recent days, lost its momentum and cautious investors pulled cash out of high-yield funds.
  • The reported an outflow was the first in seven weeks
  • Returns turned slightly negative on Thursday with the exception of CCCs, which have gained each day this week
  • Returns in the energy sector also turned negative, and could be poised for the same on Friday as WTI prices were down this morning by the most since March 1
  • While there was caution, investors made a beeline to new issues
  • The market remains ripe for borrowers. While investors withdrew cash from funds this week, retail funds have seen net inflows of ~$17 billion YTD amid a supply shortage
  • The month is on track to be the slowest April since 2017
  • Junk bond YTD returns dropped to 8.62%, still the best since 2009
  • CCC returns rose to 9.016%, the best asset class in fixed income
  • BBs stood at 8.28% and single-Bs at 8.64%
  • Energy returns dropped to 10.29% while ex-energy rose at 8.53%
  • Loans lagged junk bonds with 5.53% YTD


(PR Newswire)  Steel Dynamics Reports First Quarter 2019 Results 

  • Steel Dynamics, Inc. announced first quarter 2019 financial results.  The company reported first quarter 2019 net sales of $2.8 billionand net income of $204 million.
  • Comparatively, prior year first quarter net income was $228 million, with net sales of $2.6 billion.  Sequential fourth quarter 2018 net income was $270 million, which included additional company-wide performance-based compensation and lower earnings associated with planned maintenance outages at the company’s liquid pig iron production facility and its two flat roll steel mills.  Excluding these items, the company’s fourth quarter adjusted net income was $302 million.
  • “The team delivered a strong first quarter performance in a somewhat challenging flat roll steel pricing environment,” said Mark D. Millett, President and Chief Executive Officer.  “A downward trend in flat roll steel prices began in the second half of 2018, and continued through mid-first quarter 2019, reaching an inflection point in February 2019.  The teams were able to increase shipments and offset some of the margin compression, resulting in first quarter 2019 consolidated operating income of $292 millionand adjusted EBITDA of $382 million.  The continued stabilization and improvement in flat roll steel prices are having a positive impact, resulting in increased flat roll order activity and solid order backlogs.  We are seeing continued strength in the automotive, energy and industrial sectors, and as evidenced by strong steel fabrication backlogs, strength in non-residential construction.”
  • The company generated cash flow from operations of $182 millionduring the first quarter 2019 and maintained liquidity of $2.2 billion at March 31, 2019.  On March 1, 2019, the company used available cash of $93 million to fund the purchase of a 75 percent controlling interest of United Steel Supply, a leading distributor of painted Galvalume® flat roll steel used for roofing and siding applications.
  • As evidence of the confidence in the company’s sustainable long-term cash flow generation capability, the board of directors approved a 28 percent increase in the company’s first quarter 2019 cash dividend, reflecting the strength of the company’s capital foundation and liquidity profile.  The company also repurchased $84 millionof its common stock during the first quarter of 2019.


(Investor’s Business Daily)  New-Home Sales Surge To 16-Month High

  • New home sales unexpectedly rose 4.5% in March to a 692,000 annual rate, the best since November 2017, the Commerce Department reported Tuesday. Home sales have picked up in recent months as the Fed suspended rate hikes and mortgage rates fell, hitting a one-year low last month. That’s given new life to homebuilder stocks. Pulte Group (PHM) reported better-than-expected first-quarter earnings early Tuesday.
  • Earlier on Tuesday, Pulte Group reported flat first-quarter EPS of 59 cents a share, 12 cents ahead of estimates. Revenue rose 1.4% to $2.0 billion. Still, new orders were valued at $2.7 billion, down from $2.9 billion a year ago.
  • Pulte CEO Ryan Marshall said, “Helped by the recent decline in mortgage rates, homebuyers have been steadily returning to the market after a period of slowing demand that began in the second half of 2018.”
  • Lower rates should allow housing to help cushion the landing for an economy that has slowed somewhat as tax-cut stimulus fades. Still, most economists expect the pace of improvement to be modest.
18 Apr 2019

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • S. junk bond returns turned negative yesterday across ratings for the first time in almost four weeks. Yields were off their near 12-month low as equities faltered and oil lost momentum.
  • Issuers were undeterred, selling 5 deals for $2.6b, the busiest day in more than 4 weeks, with triple Cs accounting for almost 70% of the volume
  • Junk bond returns remain best since 2009, with 8.47% year- to-date
  • Retail funds estimate inflow of $926m at Tuesday’s close, JPMorgan wrote, citing Lipper
  • Funds have reported inflows for the last five consecutive weeks
  • 1Q saw an inflow of $13b, most since 3Q12’s $13.8b
  • Energy returns stood at 9.93% YTD
  • Ex-energy dropped to 8.2% after losing 0.06%
  • Single-Bs and CCC returns were at 8.55% and 8.59% YTD, respectively
  • BBs were at 8.2%
  • Loans lagged bonds at 5.265%
  • Steady growth, low default rate, and strong technicals provide friendly turf for junk bonds
  • Moody’s global high-yield default rate dropped to 1.9% for the 12-month period ended March 2019, lowest since October 2011
  • S. high-yield default rate is expected to close 2019 at 2.2%


(PR Newswire)  U.S. Concrete Names Ronnie Pruitt President and COO

  • S. Concrete, Inc., a leading supplier of ready-mixed concrete and aggregates in active construction markets across the country, announced today that Chief Operating Officer (“COO”), Ronnie Pruitt, 48, has been named President and COO, effective April 15, 2019. Mr. Pruitt will continue to report to Chairman and CEO, William J. Sandbrook, and in this expanded role will take over many corporate functions that support the Company’s operational business units.
  • Pruitt, who has been with U.S. Concrete since 2015, has over 25 years of industry experience.  Prior to joining U.S. Concrete, Mr. Pruitt served as Vice President of Martin Marietta Materials, Inc., and as Vice President of Cement Production and Vice President of Sales and Marketing of Texas Industries, Inc.
  • “Ronnie has been instrumental in the strategic growth of our Company including very successfully integrating Polaris Materials, a major aggregates acquisition. His leadership and record of success with our ready-mixed concrete and aggregates operations has earned him this expanded role,” said U.S. Concrete Chairman and CEO William J. Sandbrook. “Ronnie is a champion for the health and safety of our employees, is dedicated to our environmental and sustainability initiatives and is laser focused on creating enhanced shareholder value through operational excellence. I am proud of Ronnie’s success and look forward to his enhanced contributions in his expanded role.”


(CNET)  T-Mobile’s John Legere denies Justice Department pushback on Sprint merger

  • The Justice Department’s antitrust division is determining whether a combination of the US’ third- and fourth-largest wireless service providers would pose a threat to competition, according to a Tuesday report by The Wall Street Journal. Earlier this month, staffers reportedly shared concerns about the deal and the carriers’ arguments that merging would lead to key efficiencies for the company.
  • Legere tweeted that the premise of the Journal’s story “is simply untrue,” adding the company has no further comment.
  • Last year, the two carriers announced their $26 billion deal to merge. It may still take several weeks for a final decision to be made, as several state attorneys general are reviewing the deal and the Federal Communications Commission is seeking more data from the companies about the proposed merger, according to the Journal.


(Company Filing)  Western Digital Appoints Robert Eulau As Chief Financial Officer

  • Western Digital Corp. announced the appointment of Robert Eulau to lead the company’s finance organization as executive vice president and chief financial officer (CFO), reporting to Steve Milligan, Western Digital’s chief executive officer (CEO). Eulau will join Western Digital on April 22, 2019 to begin his transition into the new role and will formally take over the CFO role from Mark Long on May 9, 2019. Eulau, who joins Western Digital with more than 30 years’ experience in financial and operational leadership roles in the technology industry, succeeds Long, who, as previously announced, will be leaving the company in June 2019.
  • “Western Digital occupies an increasingly strategic position in today’s data-driven world. Bob Eulau’s background in optimizing financial and operational performance, paired with his strong leadership skills, will help position us to make the most of exciting short- and long-term growth opportunities,” said Milligan. “I’m thrilled to be adding an executive of Bob’s caliber to our leadership team and I look forward to working with him.”
  • “I’m honored to join Western Digital at such an important time in the company’s history,” said Eulau. “The team has built a strong platform for growth and value creation, and I look forward to helping maximize the many opportunities ahead for the company.”
  • Eulau was most recently CEO at Sanmina Corporation where he previously served for eight years as CFO. Previously, Eulau held chief financial officer positions at Alien Technology Corporation and Rambus Incorporated, and held a number of financial leadership roles at Hewlett-Packard Company. Eulau earned a Master’s in Business Administration (Finance/Accounting) from The University of Chicago and a Bachelor’s in Mathematics from Pomona College. He will be based at the company’s San Jose, CA headquarters location.
12 Apr 2019

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

The investment grade credit market continues to benefit from the euphoria of risk-on sentiment that is flooding the capital markets.  The OAS on the index closed Thursday at its tightest level of the year.  Segmenting the index out by quality, both the A-rated portion of the index and the BBB-rated portion are now trading at year-to-date tights.  The market also feels quite strong as we go to print on Friday morning and it looks likely that the corporate bond index will close the week even tighter still.  On the Treasury front, rates are higher across the curve, with the 5yr Treasury up 6 basis points over the past week and the 10yr Treasury up 5 basis points.

Corporate issuance was somewhat muted as borrowers brought just $10.15bln of new debt during the week.  Corporate issuance is likely to remain light in the weeks to come as many companies are now in earnings blackout periods.  The big story of the week on the new-issuance front was non-corporate borrower Saudi Arabian Oil Co, which priced $12bln of new debt across 5 tranches.  The Saudi bonds were soaked up by yield chasers across the globe on no other analysis other than it was “cheap for the rating.”  According to Bloomberg, the order book for the new issue was allegedly in excess of $100bln which is quite strong relative to the $12bln size of the deal. However, all 5 tranches of debt immediately traded wider on the break and all remain wider on the bid side as we go to print.  The 10yr tranche in particular is sucking wind, and is currently bid at +120 in the street versus its new issue pricing level of +105.  This leads us to believe that demand for this deal may have been overstated, possibly by an order of magnitude.  $26.2bln of new corporate debt has been priced in the month of April and the year-to-date tally of new issuance is up to $346bln according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of April 4-April 10 were +$8.7bln. This brings YTD IG fund flows to +$81bln.  2019 flows to this juncture are up 2.6% relative to 2018.


09 Apr 2019

2019 Q1 Investment Grade Quarterly

The performance of investment grade credit during the opening quarter of the year was in stark contrast to the final quarter of 2018, as risk assets of all stripes performed well during the first quarter. The spread on the Bloomberg Barclays US Corporate Index finished the quarter 34 basis points tighter, after opening the year at a spread of 153 and closing the quarter at a spread of 119. The one-way spread performance of investment grade credit was so pronounced that at one point in the quarter there was a 22 trading day streak where the market failed to close wider from the previous day.i This was a remarkable feat considering that there were just 61 trading days during the quarter. The 10yr Treasury opened the year at 2.68% and closed as high as 2.79% on January 18th, but it finished the quarter substantially lower, at 2.41%. Tighter spreads and lower rates yielded strong performance for investment grade credit and the Bloomberg Barclays US Corporate Index posted a total return of +5.14%. This compares to CAM’s gross total return of +4.95% for the Investment Grade Strategy.

What a Difference Three Months Makes

When the Federal Reserve issued its December FOMC statement the consensus takeaway by the investor community was an expectation of two rate hikes in 2019 with one additional rate hike thereafter, in 2020 or 2021. In any case, the prevailing thought was that we were nearing the end of this tightening cycle with a conclusion to occur over the next two or three years. The Fed then took the market by surprise in late January, with language that was more conservative than expected as FOMC commentary signaled that they were less committed to raising the Federal Funds Rate in 2019. It was at this point that the market perception shifted – with most investors expecting just one rate hike in the latter half of 2019. The March FOMC statement was yet another eyeopener for Mr. Market, with language even more dovish than the decidedly dovish expectations. The consensus view is now murkier than ever. Some market prognosticators are pricing in rate cuts as soon as 2019; but the more conservative view is that barring a material pickup in global growth or domestic inflation we may not see another increase in the federal funds rate for 6-12 months, if at all in this cycle. It is entirely possible that the current tightening cycle has reached its conclusion and that lower rates could be here to stay.

In the days following the March 20th FOMC release, the 10yr Treasury rallied sharply and there were two days during the week of March 25th where the 90-day Treasury bill closed with a slightly higher yield than the 10yr Treasury. This was the first time that this portion of the yield curve has been inverted since August of 2007. Note that this inversion was very brief in nature and as we go to print at the end of the day on April 1st, the 3m/10yr spread is no longer inverted and is now positive sloping at +17 basis points. That is not to say that this portion of the curve will not invert again, because Treasury rates and curves are dynamic in nature and ever changing.

What Has Happened to Corporate Credit Curves?

This is a common question in the conversations we have had with our investors in recent weeks. Corporate markets are entirely different from Treasury markets and behave much more rationally. The defining characteristic of corporate credit curves is that they nearly always have a positive slope. History shows that corporate credit curves typically steepen as Treasury curves get flatter. There are fleeting moments from time to time where corporate credit curves become slightly inverted but these instances are brief in nature and are quickly erased as market participants are quick to take advantage of these opportunities. For example, there may be a motivated seller of Apple 2026 bonds at a level that offers slightly more yield than Apple 2027 bonds. This has nothing to do with dislocation in the Apple credit curve and everything to do with the fact that there is an extremely motivated seller of the bond that is slightly shorter in maturity. Once that seller moves their position, the curve will return to normalcy and you could once again expect to obtain more yield for the purchase of the 2027 bond than you would for the 2026 bond. The following graphic illustrates current 5/10yr corporate credit curves for two widely traded investment grade companies, one A-rated and one BBB-rated. As you can see, corporate credit curves are much steeper than the spread between the 5 and 10yr Treasury.

The Bottom Line

The takeaway from this exercise is that investors will always be afforded extra compensation by extending out the corporate credit curve. At Cincinnati Asset Management, one of the key tenets of our Investment Grade Strategy is that we believe that it is nearly impossible to accurately predict the direction of interest rates over long time horizons. However, throughout economic cycles, we have observed that the 5/10 portion of the curve is usually the sweet spot for investors. Consequently, the vast majority of our client portfolios are positioned from 5 to 10 years to maturity. We will occasionally hold some positions that are shorter than 5 years but we almost never purchase securities longer than 10 years. Further, while an investor can earn more compensation for credit risk by extending out to 30yrs, more often than not this strategy entails excessive duration risk relative to the compensation afforded at the 10yr portion of the curve. Our strategy allows us to mitigate interest rate risk through our intermediate positioning and allows us to focus on managing credit risk through close study and fundamental analysis of the individual companies that populate our portfolios.

Where in the World is the Yield?

The value of negative yielding global debt hit a multiyear low in October of 2018 but it has exploded since, topping $10 trillion as the sun set on the first quarter, the highest level since September 2017.ii

The growth in negative yielding debt has, in some cases prompted foreign investors to pile into the U.S. corporate debt market. A measure of overseas buying in 2019 has more than doubled from a year earlier according to Bank of America Corp.iii Japanese institutions are among the biggest of the foreign investors and the Japanese fiscal year started on April 1, which could lead to even more buying interest in U.S. corporates according to Bank of America. According to data compiled by the Federal Reserve as of the end of 2018, Non-U.S. investors held 28% of outstanding U.S. IG corporate bonds.iv What does this all mean for the U.S. corporate bond market? First, it is safe to assume that foreign demand certainly played a role in the spread tightening that the investment grade credit markets have experienced year to date. Second, although U.S. rates may seem low, when viewed through the lens of global markets, they are actually quite attractive on a relative basis. As long as these relationships exist then there will be continued foreign interest in the U.S. credit markets.

Although our Investment Grade Strategy trailed the index in the first quarter, we are pleased with the conservative positioning of our portfolio. The modest underperformance can largely be explained by our significant underweight in lower quality BBB-rated credit relative to the index. We do not have a crystal ball, but are reasonably confident that we are in the later stages of the credit cycle so we continue to place vigilance at the forefront when it comes to risk management. Please know that we take the responsibility of managing your money very seriously and we thank you for your continued interest and support.

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. See Accompanying Endnotes

i Bloomberg Barclays US Corporate Total Return Value rounded to the nearest hundredth from the close on January 3rd, to the close on February 7th

ii Bloomberg, March 25, 2019, “The $10 Trillion Pool of Negative Debt is Late-Cycle Reckoning”

iii Bloomberg, March 22, 2019, “U.S. Corporate Debt Is on Fire This Year Thanks to Japan”

iv CreditSights, March 8, 2019, “US IG Chart of the Day: Who’s Got the Bonds?”

09 Apr 2019

2019 Q1 High Yield Quarterly

In the first quarter of 2019, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 7.26%, and the CAM High Yield Composite gross total return was 7.22%. The S&P 500 stock index return was 13.65% (including dividends reinvested) for Q1. The 10 year US Treasury rate (“10 year”) spent most of quarter between a range of 2.79% and 2.60%. However, over the last week and a half of the quarter, treasuries rallied and the 10 year yield dropped the range and finished at 2.41%. The 2.41% yield was down 0.28% from the end of the 2018. During the quarter, the Index option adjusted spread (“OAS”) tightened 135 basis points moving from 526 basis points to 391 basis points. This tightening in Q1 was after the massive 210 basis points of widening that took place in Q4 2018. During the first quarter, every quality grouping of the High Yield Market participated in the spread tightening as BB rated securities tightened 119 basis points, B rated securities tightened 144 basis points, and CCC rated securities tightened 187 basis points.

The Finance Companies, Energy, and Utilities sectors were the best performers during the quarter, posting returns of 9.00%, 8.27%, and 7.81%, respectively. On the other hand, Other Financial, Insurance, and Transportation were the worst performing sectors, posting returns of 5.12%, 6.33%, and 6.34%, respectively. At the industry level, refining, oil field services, pharma, and supermarkets all posted the best returns. The refining industry (12.20%) posted the highest return. The lowest performing industries during the quarter were retail REITs, office REITs, airlines, and life insurance. The retail REIT industry (2.86%) posted the lowest return.

During the first quarter, the high yield primary market posted $74.4 billion in issuance. Issuance within Financials was the strongest with almost 18% of the total during the quarter. The 2019 first quarter level of issuance was a bit more than the $66.4 billion posted during the first quarter of 2018. When 2019 is complete, it is likely that the final issuance for the year will be higher than the $186.9 posted during all of 2018. The Federal Reserve held two meetings during Q1 2019, and the Federal Funds Target Rate was held steady at both meetings. While the Target Rate didn’t move, the real story was the shift in messaging by the Fed. The January FOMC statement showed that the Fed was at least thinking about the end of rate increases.i The March FOMC statement moved further in that direction with officials acknowledging weaker economic reports and downgrading their GDP estimates.ii Additionally, the Fed dot plot was signaling zero rate hikes in 2019 as of the March statement. This was down from a projected three hikes in 2019 from just three months ago. The Fed is still currently out of step from what the market is expecting. Even with no hikes projected in 2019, they are projecting one hike in 2020. However, market participants are currently pricing in a better than fifty percent probability that the Fed cuts rates in 2019.

While the Target Rate moves tend to have a more immediate impact on the short end of the yield curve, yields on intermediate Treasuries decreased 28 basis points over the quarter, as the 10-year Treasury yield was at 2.69% on December 31st, and 2.41% at the end of the quarter. The 5-year Treasury decreased 28 basis points over the quarter, moving from 2.51% on December 31st, to 2.23% 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. Inflation as measured by core CPI has been trending lower since the 2.4% print in mid-2018. The most recent print was 2.1% as of the March 12th report. The revised fourth quarter GDP print was 2.2% (quarter over quarter annualized rate). The consensus view of most economists suggests a GDP for 2019 around 2.4% with inflation expectations around 1.9%.

Over the course of Q1, more headlines had been made about certain parts of the yield curve inverting. Importantly, the much watched 2year/10year has yet to invert and at quarter end maintained a spread of 15 basis points. Additionally, some market participants are not as concerned that the yield curve inverts, but they are focused on the magnitude of inversion. There has been work done suggesting that the central bank is compressing the 10 year by around 65 basis points.iii Further, there are other forces at play that have the ability to move rates meaningfully for a period of time. Recently, a wave of traders hedging their positions in the swaps market helped explain the downward move in treasury rates.iv The prolonged government shutdown was a major news item during the quarter. The shutdown lasted 35 days making it the longest shutdown in US history. Ultimately, the shutdown ended with a short term funding package to provide Congress time to negotiate a deal on immigration and border security. As the short term package approached its deadline, legislation was signed to fund the government through September of 2019. Across the pond, the withdrawal of the United Kingdom from the European Union, known as Brexit, continued to dominate the headlines. Many votes have been held in Parliament to decide the Brexit outcome. However, the debate continues and the eventual ripples around the globe are still far from clear. Finally, the trade negotiations between the US and China are ongoing. The very latest reports suggest that representatives are going line by line over the proposed agreement and the end is likely near.

Being a more conservative asset manager, Cincinnati Asset Management remains significantly underweight CCC and lower rated securities. For the first quarter, each quality cohort posted very similar performance. As noted above, our High Yield Composite gross total return was also very similar to the return of the Index. With the market so strong to start the year, our cash position was the largest drag on our overall performance. Additionally, our underweight in the energy sector and overweight in the consumer cyclical services industry were a drag on our performance. Further, our credit selections within the consumer cyclical services industry hurt performance. However, our overweight in the capital goods sector and midstream industry were bright spots. Further, our credit selections within the midstream, other industrial, and building materials industries were a benefit to performance.

The Bloomberg Barclays US Corporate High Yield Index ended the first quarter with a yield of 6.43%. This yield is an average that is barbelled by the CCC rated cohort yielding 10.52% and a BB rated slice yielding 4.85%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), declined throughout the first quarter moving from a reading of 25 down to 14. High Yield default volume stayed low during the first quarter with only nine issuers defaulting. The twelve month default rate was 0.94% and is the lowest default rate since 2014. v Additionally, fundamentals of high yield companies continue to be mostly good. From a technical perspective, supply remains generally low and flows have been positive during the first three months of the year. Due to the historically below average default rates, the higher yields available relative to other spread product, and the diversification benefit in the High Yield Market, it is very much an area of select opportunity that deserves to be represented in many client portfolio allocations.

With the High Yield Market starting 2019 firing on all cylinders in terms of performance, it is important that we exercise discipline and selectivity in our credit choices moving forward. The first quarter displayed similar returns across the quality buckets, and that is unlikely to remain the case over the balance of the year. As the returns start to diverge, it is expected that more opportunities will present themselves. The market needs to be carefully monitored 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 See Accompanying Endnotes 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.

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 30,2019: “Fed Folds as Message Shifts to Peak from Pause”

ii Bloomberg March 20, 2019: “Powell’s FOMC Turns Pessimistic and Passive”

iii Bloomberg December 19, 2018: “For Some, Curve Inversion Isn’t If or When, But How Deep”

iv Bloomberg March 26, 2019: “Here’s Why Bond Yields Plunged So Much Over the Past Week”

v JP Morgan April 1, 2019: “Default Monitor”

08 Apr 2019

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 $15.2 billion.  New issuance for the week was $3.8 billion and year to date HY is at $61.8 billion, which is 4% over the same period last year.


(Bloomberg)  High Yield Market Highlights

  • S. junk bonds saw the biggest fund inflow in 10 weeks as the rally extended with yields dropping across the risk spectrum.
  • Junk bonds have seen cash inflows for four consecutive weeks and in 10 of the last 12 weeks
  • Retail funds have reported net inflows of ~$15b YTD vs the $19b outflows for the same period in 2018
  • Yields were near 6-month lows and spreads held firm near the October levels as oil was above $60 and equities rebounded
  • On Staples’ aggressive $2.125b 2-part offering to fund a dividend distribution to equity sponsors, a secured tranche had orders of more than $2.5b, while the unsecured tranche was about deal size
  • Staples is out with initial price talk of 10% area for a $1.375b 8-year unsecured tranche and about 7.5% on a $750m 7- year secured bond
  • Junk bond returns rose to 7.64% YTD making it still the best since 2003
  • CCCs slid to 7.54% YTD after posting negative returns yesterday
  • Single-Bs beat CCCs with 7.65%
  • BBs return is 7.5%
  • IG returns are 4.78%
  • Loans have gained 4.54%
  • The energy sector posted the best 1Q return since 2009 with 8.3% and it continued to be the best performing sector YTD, with 9.32%
  • Low default, steady oil, a dovish Fed, strong technicals — reflected in net inflows and slow issuance — boost risk assets


(Reuters)  UGI to buy rest of AmeriGas Partners in $2.44 billion deal

  • Energy distributor UGI Corp said on Tuesday it would buy the remaining nearly 75 percent it does not own in retail propane marketer AmeriGas Partners LP in a cash-and-stock deal valued at $2.44 billion.
  • Pennsylvania-based UGI also cut its fiscal 2019 profit forecast because of a warmer-than-normal winter in Europe
  • In the AmeriGas deal, shareholders will receive 0.50 shares of UGI in addition to $7.63 in cash for each share owned, the companies said in a statement.
  • The offer represents a premium of 13.5 percent to AmeriGas’s Monday closing price. The company’s shares were up 13 percent in morning trade on Tuesday.
  • “This transaction significantly enhances UGI’s free cash flow, one of the key elements of our long-term success,” UGI Chief Executive Officer John L. Walsh said on a conference call with analysts.
  • “It will allow us to increase our dividend by a cumulative 25 percent,” he added.


(Business Wire)  U.S. Department of Energy extends AECOM-led joint venture contract at the Savannah River Site for an additional 18 months

  • AECOM, a premier, fully integrated global infrastructure firm, announced today that the U.S. Department of Energy’s (DOE’s) Savannah River Operations Office in Aiken, South Carolina, extended the current liquid waste management contract with AECOM-led Savannah River Remediation LLC. The approximate US$750 million extension will run from April 1, 2019, to September 30, 2020. The value of the contract extension was included in AECOM’s backlog in the second quarter of fiscal 2019.
  • “We are pleased that the DOE has decided to extend Savannah River Remediation’s contract,” said John Vollmer, president of AECOM’s Management Services group. “AECOM has a long history of supporting the DOE at the Savannah River Site and extensive experience in liquid waste disposition. We are committed to safely managing the radioactive waste system at the site while reducing the state of South Carolina’s critical environmental risk.”
  • During the contract extension period, services that the AECOM-led joint venture will perform are operating the Defense Waste Processing Facility and Saltstone Production Facility, and continuing progress on the Tank Closure Cesium Removal demonstration and construction project and the construction of Saltstone Disposal Unit 7.


(Wall Street Journal)  T-Mobile Spells Out CFO Exit Plan

  • T-Mobile US filed an amended employment agreement for its finance chief that spells out a plan for him to leave the company as it awaits regulatory review of a proposed merger with rival Sprint Corp.
  • CFO Braxton Carter has been a key figure in the mobile carrier’s pending deal to buy Sprint. A spokeswoman for T-Mobile declined to comment on whether a successor had been chosen.
  • Carter’s last day at T-Mobile will be decided by the status of the merger, the company said in a regulatory filing with the Securities and Exchange Commission. Mr. Carter is scheduled to leave at one of three fixed dates, depending which arrives first: the end of 2019; 20 days after the first quarterly filing of the merged company; or 20 days after an announcement the deal is off.
  • Analysts speculated about the departure of Mr. Carter in September, when T-Mobile said Sunit Patel would join the company to lead its expected integration with Sprint. Mr. Patel had been chief financial officer at CenturyLink Inc.
29 Mar 2019

CAM High Yield Weekly Insights

(Bloomberg)  High Yield Market Highlights

  • March has priced $19.4b so far, the slowest third month since 2009
  • Average March issuance has been $31b in last five years
  • This will be the slowest 1Q since 2016, which was hit by WTI dropping to a more than 13-year low
  • Inflows slowed a bit this week as markets stalled
  • Net inflows total ~$11b YTD vs outflows of ~$18b in the same period last year
  • S. high yield returns of 6.99% YTD is best since 2003
  • BBs beat single Bs and CCCs with a YTD return of 6.99%
  • Single-Bs beat CCCs, with YTD return of 6.949%
  • CCCs YTD was 6.76%, the lowest in the high yield space
  • CCCs are having best 1Q since 2012
  • Leveraged loans, higher in the capital structure, have YTD returns of 3.85%
  • S. junk bonds operate against backdrop of strong technicals as reflected in net inflows into retail funds and light supply, low default rate, steady corporate earnings, Fed accommodation
  • Markets imply more than a 55% probability of the Fed cutting rates as early as September and 62% in October


(Reuters)  Leverage levels peaking again on US mega buyouts 

  • Leverage levels on US private equity buyouts are returning to record levels and private equity firms’ equity checks are shrinking as banks underwrite more aggressive loans, safe in the knowledge that they will not be penalized by regulators.
  • Average leverage levels of 6.8 times in 2019 so far are rebounding towards a recent record of 6.97 times in the third quarter of 2018, before year-end volatility cooled the market and the number fell to 6.09 times, according to LPC data.
  • As leverage and the amount of debt that sponsors are piling on businesses is rising, the amount of equity they are contributing is falling. Equity checks of 35.7% in the first quarter of 2019 so far are lower than 38.7% in 2018 and 43.3% in 2017, the data shows.
  • Huge highly leveraged buyout loans are contributing to the spike, including US$3.2bn of loans for travel commerce platform Travelport and a US$6.4bn dual-currency loan for Power Solutions, which backs the buyout of Johnson Controls’ battery unit.
  • Current leverage ratios are the highest debt-to-Ebitda levels seen since the second quarter of 2007, before the financial crisis, when leverage also averaged 6.8 times. This is due to regulators giving more freedom to arranging banks and investors’ hunt for higher yield, market participants said.
  • US regulators implemented Leveraged Lending Guidance (LLG) in 2013 to limit systemic risk. This imposed extra scrutiny on loans with leverage greater than 6 times and also required all secured debt or half of total debt to be able to be paid down within five to seven years.
  • LLG was relaxed last year when government agencies said that it was guidance and not a rule, which is encouraging banks to arrange more highly leveraged deals without fear of regulatory penalties. It is also producing riskier deals and more aggressive market conditions.


(CNBC)  Bond market says not only is a recession coming, but the Fed will cut interest rates to stop it 

  • Fed funds futures were pointing to a quarter point in easing, as traders said scary signals continued to emanate from the bond market
  • There was an inversion in the yield curve, meaning very short rates rose above longer 10-year note rates, a fairly reliable recession signal
  • Traders say the bond market may be overreacting, while stocks seem to be ignoring the recession warnings and fears the Fed will have to jump in with one or more rate cuts to stop the economy from rolling over
  • One strategist commented that he believes some of the moves in the market Monday were more about technical signals and short squeezes than real fear about recession. The Fed changed the tone in markets significantly when it was even more dovish than expected and cut its rate forecast to just one for this year from two.


(Bloomberg)  Here’s Why U.S. Bond Yields Plunged So Much Over the Past Week

  • The Federal Reserve’s surprise policy shift last week shook markets, but, even still, the intensity of the ensuing drop in U.S. bond yields has puzzled many observers. A massive wave of hedging in the swaps market helps explain the scale of the eye-catching move.
  • Treasuries rallied after the Fed signaled it was done raising interest rates for the moment, driving yields on 10-year notes down to levels last seen in 2017. That forced two sets of
    traders — those who had bought mortgage bonds and those who had bet markets would remain calm — to turn to derivatives markets to tweak their portfolios or stanch their losses. They snapped up positions in interest-rate swaps, pushing Treasury yields down even more.
  • What’s the evidence? While yields on 10-year Treasuries declined to as low as 2.35 percent, the rate on similar maturity swaps dropped to as little as 2.30 percent, according to data compiled by Bloomberg. The 10-year swap spread, as the gap between the two is known, had shown the swap rate at a premium for nearly all of the past year until last week. But that has now flipped to a discount and the gap has gone to a level unseen since 2017, indicating a flurry of activity in the derivatives market.
  • The Treasuries rally and resulting volatility surge quickly burned those who had sold options, pressuring them to hedge in the swaps market by receiving fixed rates. That’s tantamount to going long Treasuries and is a profitable trade if yields keep falling. The intensity of that trading — along with the actions of mortgage investors — accelerated the drop in Treasury yields.
22 Mar 2019

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly

The investment grade credit markets closed at YTD tights on Thursday evening, riding a wave of strong sentiment from a surprisingly dovish Fed statement on Wednesday.  The story changed on Friday, however, with a decidedly softer tone fueled by concerns about the lack of growth globally.  Credit is mixed as we go to print on Friday with major stock indices firmly in the red on the day.  The 10yr Treasury will finish the week almost 10 basis points lower than where it started, which will likely mark a YTD low for the benchmark rate.  After peaking at 3.24% in November of 2018, the 10yr has now completely retraced its steps to 2.43%, which is almost exactly where it opened in 2018.  The extreme volatility that we have seen in rates over the past six months offers us a reminder of just how difficult it can be to accurately predict interest rate moves and this unpredictability is the reason that we at CAM focus on credit risk and the intermediate portion of the yield curve as opposed to trying to predict where rates will go next by making duration bets.

It was another solid week of issuance for corporate bowers, as companies brought $21.55bln in new corporate debt during the week.  $88.125bln of debt has been priced in the month of March and the year-to-date tally of new issuance is $292.298bln according to data compiled by Bloomberg.  The pace of 2019 IG issuance is trailing 2018 by 9%.

According to Wells Fargo, IG fund flows during the week of March 14-March 20 were +$4.5 billion. This brings YTD IG fund flows to +$62.222bln.  2019 flows to this juncture are up 2.43% relative to 2018.

22 Mar 2019

CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.3 billion and year to date flows stand at $12.7 billion.  New issuance for the week was $8.4 billion and year to date HY is at $53.0 billion, which is -0% over the same period last year.


(Bloomberg)  High Yield Market Highlights

  • S. junk bond returns hit 7 percent for the year-to-date as BB yields fell to a 13-month low after the Fed’s mid-week dove surprise.
  • S. high-yield funds have seen net inflows in 8 of the last 10 weeks
  • Junk bond rally also boosted by S&P 500 at a 5- month high, oil at a 4-month high
  • Supply was steady, with another $1.8b pricing led by ADT’s senior secured tranches
  • Senior secured notes dominated junk bond supply year-to-date accounting for 30% of the issuance activity, the highest proportion in at least 2 years
  • They accounted for 13% of the supply last year and 21% the year before
  • ADT cut its bond offering to $1.5b after dropping the $1.25b 8NC3 senior unsecured tranche as there was not enough demand for those notes at an acceptable rate
  • Both secured tranches priced at lower end of talk, had orders above $3b for the 2 tranches combined
  • With loan supply lagging this year, senior secured notes are being used to repay loans and/or fund acquisitions as in Power Solutions
  • High-yield returns YTD surged to 7%, the best in fixed income
  • Single-Bs beat CCCs for second time this year, with YTD return of 6.97%
  • BBs and CCCs were at 6.93%
  • Loans lag high yield, with YTD return of 4.2%


(Business Wire)  B&G Foods Announces that Bill Herbes, EVP of Operations, Plans to Retire

  • B&G Foods announced today that William F. Herbes, the Company’s Executive Vice President of Operations, plans to retire at the end of December 2019. Mr. Herbes, age 64, has served as Executive Vice President of Operations since joining the Company in August 2009.
  • Commenting on Mr. Herbes’ retirement plans, Kenneth G. Romanzi, who currently serves as Executive Vice President and Chief Operating Officer and, as previously announced, will become B&G Foods’ next President and Chief Executive Officer on April 6, 2019, said, “Bill has been a very important member of our management team since joining B&G Foods almost ten years ago. It has been a privilege to work with Bill and I am delighted that Bill has agreed to remain with B&G Foods through year end and partner with Erich Fritz, our Executive Vice President and Chief Supply Chain Officer, to continue to evolve our operations to become even more efficient and cost effective.”
  • Robert C. Cantwell, President and Chief Executive Officer of B&G Foods said, “Bill has been a tremendous contributor to B&G Foods’ growth over the past ten years. Since assuming responsibility for our supply chain and manufacturing operations in 2009, our company’s net sales have more than tripled and our domestic and international sourcing and manufacturing operations and capabilities have greatly expanded. Mr. Herbes has played an integral role in our growth, including through post-M&A integration of numerous manufacturing facilities, distribution centers and co-pack arrangements, including B&G Foods’ two largest manufacturing facilities. Under Bill’s strong leadership, we also successfully established a frozen distribution network following our acquisition of the Green Giantbrand and successfully outsourced our shelf-stable distribution network to a third-party logistics provider. Over the years, Bill has also played a key role in our cost savings initiatives. I am very pleased that Bill will continue with B&G Foods through the remainder of 2019 and wish him the best of luck in his retirement.”


(PR Newswire)  Steel Dynamics Provides First Quarter 2019 Earnings Guidance

  • Steel Dynamics provided first quarter 2019 earnings guidance in the range of $0.88 to $0.92 per diluted share.  Comparatively, the company’s sequential fourth quarter 2018 earnings were $1.17 per diluted share and prior year first quarter earnings were $0.96 per diluted share. Fourth quarter 2018 results included additional company-wide performance-based compensation of $0.04 per diluted share and lower earnings of $0.10 per diluted share, associated with planned maintenance outages at the company’s liquid pig iron production facility and its two flat roll steel mills.
  • First quarter 2019 earnings from the company’s steel operations is expected to decrease in comparison to sequential fourth quarter results, primarily related to lower earnings from the company’s sheet operations.  However, recent increases in sheet steel prices are having a positive impact, resulting in increased order activity and reconstituted order backlogs.
  • Overall steel shipments are expected to increase in the first quarter 2019, compared to fourth quarter 2018 results, and average quarterly steel product pricing is expected to decrease more than the cost of average scrap consumed.  The company believes domestic steel consumption will continue to improve through the year.


(New York Times)  Fed, Dimming Its Economic Outlook, Predicts No Rate Increases This Year

  • The Federal Reserve said Wednesday that the United States economy was slowing more than it had previously thought as it left interest rates unchanged and signaled little appetite for raising them again in the near future.
  • The Fed now expects 2.1 percent growth this year, down from the 2.3 percent it forecast in December. The outlook for 2020 is even more bleak, with the Fed now projecting growth of just 1.9 percent.
  • The downbeat assessment comes as the Fed sees signs of weakness in areas like consumer spending and business investment, which Mr. Powell said “suggest that growth is slowing somewhat more than expected.” Average monthly job growth, while strong, “appears to have stepped down from last year’s strong pace,” he added.
  • Powell tried to reassure markets by saying “economical fundamentals are still very strong,” but he acknowledged that recent developments both domestically and abroad were making it harder for the American economy to grow as quickly as it did last year.
  • Forecasts released at the end of the two-day meeting show the typical member of the Federal Open Market Committee now expects not to raise rates at all this year. Most officials now expect a single rate increase in 2020 and none in 2021.