Insight – Page 32 – Cincinnati Asset Management

15 Jul 2019

Insight, Investment Grade Quarterly Josh Adams - Portfolio Manager 0 comment

2019 Q2 INVESTMENT GRADE QUARTERLY

The investment grade credit market continued to perform well during the second quarter of the year. The Bloomberg Barclays US Corporate Index opened the quarter at an option adjusted spread of 119 and traded as tight as 109 by mid-April before ending the last trading day of June at a spread of 115. Lower quality credit modestly outperformed during the quarter with the BBB-rated portion of the index tightening by 7 basis points relative to the A-rated portion which tightened by 3 basis points. The bigger story of this quarter was lower Treasury yields as the 10yr Treasury finished the quarter 40 basis points lower than where it started. The 10yr ended the first 6 months of 2019 at 2.005% after closing as high as 2.78% in the first few weeks of January. Tighter spreads and lower Treasuries have combined to yield strong performance for investment grade creditors. The Bloomberg Barclays US Corporate Index posted a total return of +9.85% through the first 6 months of the year. This compares to CAM’s gross return of +9.20% for the Investment Grade Strategy.

When Doves Cry

As longtime clients and readers know, at Cincinnati Asset Management we avoid speculating on the direction of interest rates. Instead we direct our efforts to bottom up credit research, thoroughly studying individual credits and diligently following industry trends, then opportunistically sourcing bonds which can add the most value to the overall portfolio. By positioning the portfolio with intermediate maturities ranging from five to ten years, we mitigate a significant portion of interest rate risk as investors are generally rewarded over medium and longer term time horizons by avoiding tactical positioning and the downside that can come about from being too short or too long with duration bets gone awry. However, while we may be interest rate agnostic, we are not interest rate blind. We would be remiss if we did not comment on the policy actions that we have seen out of the Federal Reserve thus far in 2019. Simply put, the Fed continues to exceed the dovish expectations of the market, a remarkable feat given the extent that the market is pricing in rate cuts, with Fed Funds futures data implying a 100% probability of a rate cut at next FOMC decision on July 31i. We take this as a sign from the Fed that it is extremely concerned with managing a so called “soft landing” when the current economic expansion finally runs out of steam.

The actions of the Fed do not occur in a vacuum and they can have a significant impact on risk assets such as corporate credit. Lower Fed Funds rates coupled with the potential for future slowing economic growth can lead to lower risk-free rates (Treasury rates). When risk-free rates are low, yield starved investors from around the globe turn to large liquid markets in order to satiate their thirst for income thus setting their sights on the corporate credit market. Defaults remain nearly non-existent in the investment grade universe, and when coupled with a still growing economy, this can be a recipe for complacency and a tendency to “reach” for yield. Investors can reach for yield in two ways in IG credit; they can either extend duration or they can take on additional credit risk, but they usually do both. These are ill-advised strategies in our view, especially for investors concerned with capital preservation over a long time horizon. As far as extending duration is concerned, the compensation afforded for extending from a 10yr bond to a 30yr bond typically pales in comparison to the additional interest rate risk that is incurred. What most investors fail to realize is that most duration extensions also contain a significant dose of credit risk. Take the following example with Comcast’s 10yr and 30yr bonds:

An investor receives just 87 basis points of extra compensation for purchasing Comcast’s 30yr bond versus its 10yr bond, and in exchange, the investor takes on an additional 9.4yrs of duration risk. This means that if there is a linear shift in the yield curve and interest rates increase by 100 basis points, the investor in the 30yr bond will capture an additional nine points of downside. However, duration alone does not tell the whole story, as this is not just a story about interest rate risk as much as it is also a story about credit risk. Our hypothetical investor could purchase the risk-free rate instead of the corporate bond, and as you can see from the example above, the spread between the 10 and 30 year Treasury is 53 basis points. If we subtract this 53 basis points from the 87 basis points in spread between the Comcast 10yr and 30yr the difference is 34 basis points. Therefore, 34 basis points is the compensation that the investor receives for the additional credit risk incurred for the purchase of the 30yr Comcast bond in lieu of the 10yr Comcast bond. We like Comcast as an in investment. It is a best-in-class operator in its industry and it generates tremendous free cash flow. But we do not like it enough to lend it money for an additional 20 years in exchange for just 34 basis points of compensation for that credit risk. It simply does not make much sense to us from a risk-reward standpoint.

If you have not yet nodded off from this exercise in corporate credit, the other aforementioned avenue for increasing yield is to simply take on more credit risk by buying shorter maturity bonds of companies with marginal credit metrics. Usually the bonds of companies with marginal credit metrics will offer outsize compensation relative to the bonds of companies with stable or improving credit metrics. There is almost always a reason that the bonds of a marginal company will offer more yield but an investor really has to dig into the numbers and the industry to understand why. Sometimes it may simply be a case of a company that has too much debt or perhaps the business is showing signs of deterioration. Sometimes these investments may well work out but it only takes one or two permanent impairments (downgrade to high yield, structural subordination, default or fraud) to severely impact the performance of a bond portfolio. Taking on more credit risk is not worth it in the current environment in our opinion and is one of the reasons we are significantly structurally underweight the BBB and lower-rated portion of the investment grade universe. We cannot accurately predict when the business cycle will contract but we most assuredly are viewing all new and current investments through a late-cycle lens as we populate the portfolio with companies that have durable business models and the ability to generate free cash flow and comfortably service debt in a recessionary environment.

BBB, Leading the Way

The lowest quality component of the investment grade universe has significantly outperformed the higher quality portion thus far in 2019. The OAS for the index as a whole was 38 basis points tighter through the end of the second quarter. If we segment that by credit quality, the A-rated portion of the index was 30 basis points tighter while the BBB-rated portion of the index was 51 basis points tighter.

Much has been written about the growth of BBB-rated credit, and for good reason. At the end of 2008 it represented 33.15% of the index but at the end of 2018 that figure had swollen to 51.21%. We cap the exposure of our portfolios to BBB-rated credit at 30%, thus we are much more conservatively positioned than the index. We think that this conservative positioning is especially crucial in times like these and we have no intention of increasing our exposure in the near term.

What Happened to Regulators Looking out for the Little Guy?

We typically avoid commenting on regulatory matters but an SEC proposal that was greenlighted in the second quarter has us flummoxed. Regulators recently approved a pilot program that shows a blatant disregard for retail investors and financial advisorsii. Trade disclosure in the corporate bond market has come a very long way in the past 15 years. It is still an over-the-counter market but there was a time in the not too distant past when it was rife with opacity in that there was simply no record of the price at which a bond was traded. The market has slowly but surely evolved and today there is an electronic record of where all corporate bonds trade within 15 minutes of when the trade was completed.

An SEC committee comprised mostly of the largest asset managers and broker dealers on the street voted to enact a 1-year pilot proposal that would roll back much of the progress that has been made with trade disclosureiii. The proposal centers on “block” or large bond trades. The current rule for IG corporate bonds caps trade size dissemination at $5 million but the trade must be posted within 15 minutes. So, as the rule stands today, a trade could have been completed for $50 million of a specific bond issue but unless you are privy to the details you will only know that at least $5 million traded and you will know at what price and you will know this information within 15 minutes of trade completion. This provides some (and we would argue more than adequate) protection to dealers who can buy a large block of a bond from an asset manager and then sell the bond to other asset managers over time without other market participants knowing that the dealer owns a large amount of that particular bond issue. The pilot proposal would increase the dissemination cap to $10 million, and unbelievably, would allow for up to a 48-hour delay (!) before the trade is reported. We oppose the proposal in its entirety as we believe markets are more efficient with more, not less, information, but we take particular issue with the reporting delay. Ironically, the proposal arguably helps us at CAM because it makes the professional management we provide even more valuable. It will not impact our ability to affect best execution because we are in the corporate market all day every day and have many resources and relationships at our disposal to determine where bonds should trade but the proposal is debilitating to the ability of an individual investor or advisor to engage in price discovery.

To understand the potential real-world implications imagine a scenario where Cincinnati Asset Management (CAM) sells $12 million of a particular bond to a dealer at $100. Remember, the trade does not need to be posted for two days. In the interim you, the reader, log into your brokerage account intending to purchase that same bond. You see a price of $105 offered to you, and see no other trades have posted for this particular bond. CAM’s hypothetical $12 million trade has yet to be reported, and you have no way of knowing about it. That $105 price looks fair to you so you purchase the bond. Shortly thereafter the broker-dealer sells the bonds they bought from CAM at $100.25 and both trades are publicly posted. Now you can see that the bond just traded $100-$100.25 and suddenly it appears that you overpaid. But how could you have known if you are not armed with adequate information? This is the proposal in a nutshell – temporarily hiding data from public view for the benefit of a privileged few.

As far as we can tell the only purpose of this proposal is to provide liquidity to large asset managers at the expense of small investors and to enrich the largest broker dealers on the street. Even if it may help us we are still against this proposal as it stands today because it is simply unfair and it is a step back for the corporate credit market. We believe that transparency is necessary for healthy and fully functioning capital markets and that this transparency is the only way to make the market fair to investors of all types, both large and small.

Looking Ahead

As we turn the page to the second half of the year we see more uncertainty ahead. Global trade continues to dominate the headlines and investors are becoming increasingly concerned about economic growth in the Eurozone. As we go to print with this letter the German 10yr Bund is trading at a record low of -0.36%iv. Geopolitical risk too is at the forefront as tensions between the U.S. and Iran remain high. Although the investment grade credit market has performed quite well to start the year we plan to remain conservative in the positioning of our portfolio. We welcome any questions, comments or concerns. 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.

i Bloomberg, July 1, 2019, 2:08 PM EDT, World Interest Rate Probability (WIRP)
ii FINRA Requests Comment on a Proposed Pilot Program to Study Recommended Changes to Corporate Bond Block Trade Dissemination, April 12, 2019, https://www.finra.org/industry/notices/19-12, Accessed July 1, 2019
iii The Wall Street Journal, June 27, 2019, Bond Fight Pits Main Street Against Wall Street
iv CNBC, July 2, 2019, German 10-year bund yield falls to record low, US Treasurys stable amid softer GDP outlook

15 Jul 2019

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

2019 Q2 High Yield Quarterly

In the second quarter of 2019, the Bloomberg Barclays US Corporate High Yield Index (“Index”) return was 2.50% bringing the year to date (“YTD”) return to 9.94%. The CAM High Yield Composite gross total return for the second quarter was 3.59% bringing the YTD return to 11.07%. The S&P 500 stock index return was 4.30% (including dividends reinvested) for Q2, and the YTD return stands at 18.54%. The 10 year US Treasury rate (“10 year”) spent most of quarter in rally mode finishing at 2.01% and down 0.40% from the beginning of the quarter. During the quarter, the Index option adjusted spread (“OAS”) tightened 14 basis points moving from 391 basis points to 377 basis points. There was a massive 210 basis points of widening that took place in Q4 2018 and since that time, the OAS has tightened 149 basis points. During the second quarter, the higher quality segments of the High Yield Market participated in the spread tightening as BB rated securities tightened 8 basis points and B rated securities tightened 2 basis points. The lowest quality segment, CCC rated securities, widened 10 basis points.

The Banking, Finance, and Insurance sectors were the best performers during the quarter, posting returns of 4.64%, 4.11%, and 3.87%, respectively. On the other hand, Energy, Other Financial, and Basic Industry were the worst performing sectors, posting returns of -0.92%, 1.01%, and 1.66%, respectively. At the industry level, supermarkets, environmental, p&c insurance, and life insurance all posted the best returns. The supermarkets industry (5.35%) posted the highest return. The lowest performing industries during the quarter were oil field services, independent energy, retail REITs, and chemicals. The oil field services industry (-4.37%) posted the lowest return.

During the second quarter, the high yield primary market posted $81.4 billion in issuance. Issuance within Consumer Discretionary was the strongest with 22% of the total during the quarter. The 2019 second quarter level of issuance was much more than the $52.8 billion posted during the second quarter of 2018. When 2019 is complete, there is little doubt that the final issuance for the year will surpass the $186.9 posted during all of 2018.

The Federal Reserve held two meetings during Q2 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 continued 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 At a conference in early June, Chairman Powell pushed forward the idea of possible rate cuts.iii The market has taken notice and, as of this writing, investors are pricing in a 100% probability of a cut at the FOMC July meeting.iv As can be seen in the chart at the left, the Fed is still currently out of step from what the market is expecting. While we are interest rate agnostic and do not attempt to time interest rate movements, we are very aware of the impact Fed policy has on the markets. Therefore, we will continue to monitor this very important theme throughout the rest of this year and into 2020.

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 40 basis points over the quarter, as the 10-year Treasury yield was at 2.41% on March 31st, and 2.01% at the end of the quarter. The 5-year Treasury decreased 46 basis points over the quarter, moving from 2.23% on March 31st, to 1.77% 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 2.0% as of the June 12th report. The revised first quarter GDP print was 3.1% (quarter over quarter annualized rate). The consensus view of economists suggests a GDP for 2019 around 2.5% with inflation expectations around 1.9%.

Besides the Fed’s more dovish messaging, the rising trade tensions between the US and China was another major theme over the course of Q2. Throughout the quarter, both countries were increasingly posturing in order to bolster their negotiating position. However, the market was well aware of the G20 meeting taking place in Japan at the end of June. It was likely that new information would come out of a meeting between President Trump and China’s leader Xi Jinping. Now that the G20 has taken place, regarding the trade talks, Trump said “we’re right back on track.”v It has been universally reported that the meeting between the two leaders was very productive on many of the contested issues. However, at this point, it is very probable that the topic of global trade will remain at the forefront of investors’ minds for quite some time.

Being a more conservative asset manager, Cincinnati Asset Management is structurally underweight CCC and lower rated securities. This positioning has served our clients well so far in 2019. As noted above, our High Yield Composite gross total return has outperformed the Index over the second quarter and YTD measurement periods. With the market remaining robust during the second quarter, our cash position remained the largest drag on our overall performance. Additionally, our underweight positioning in the communications, banking, and finance sectors were a drag on our performance. Further, our credit selections within the communications sector and automotive industry hurt performance. However, our underweight in the energy sector and overweight in the consumer noncyclical sector were bright spots. Further, our credit selections within the midstream, consumer services, and healthcare industries were a benefit to performance.

The Bloomberg Barclays US Corporate High Yield Index ended the second quarter with a yield of 5.87%. This yield is an average that is barbelled by the CCC rated cohort yielding 10.14% and a BB rated slice yielding 4.36%. Equity volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”), oscillated a bit throughout the quarter but finished about where it started with a reading of 15. High Yield default volume remained low during the second quarter with only six issuers defaulting. The twelve month default rate was 1.46%. vi Additionally, fundamentals of high yield companies continue to be mostly good. From a technical perspective, supply has increased from the low levels posted in 2018, and flows have been positive relative to the negative flows of 2018. 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 remaining very firm in terms of performance, it is important that we exercise discipline and selectivity in our credit choices moving forward. While the first quarter displayed similar returns acrossthe quality buckets, the second quarter began to show investors differentiating a bit on the lower quality spectrum as the CCC bucket underperformed the broader market. As more differentiating creeps into the high quality buckets, it is expected that opportunities for our clients will be presented. 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 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.

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 June 4, 2019: “Powell Signals Openness to Fed Cut”

iv Bloomberg July 1, 2019, 4:00 PM EDT: World Interest Rate Probability (WIRP)

v The New York Times June 29, 2019: “5 Takeaways From the G20 Summit” vi JP Morgan July 1, 2019: “Default Monitor”

12 Jul 2019

High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

CAM High Yield Market Note

7/12/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at $13.9 billion. New issuance for the week was $0.8 billion and year to date HY is at $134.1 billion, which is +24% over the same period last year.

(Bloomberg) High Yield Market Highlights

U.S. high-yield bonds are set to open with support from climbing stock futures and optimism that central banks will keep interest rates in check. That may allow the market to end the week on a high note after yields widened in all but one of the past four days.
The Bloomberg Barclays U.S. Corporate High Yield index returned -0.07% this week through Thursday.
Retail funds had a fifth consecutive week of inflows
Month- to-date volume stood at $4.6b and July has traditionally been a light month for issuance averaging about $14b in the last six years
Yields rose and returns turned negative again across all ratings with Triple-Cs losing the most yesterday
While the Bloomberg Barclays high yield index dropped 0.05% yesterday, the energy index posted gains of 0.08%
Junk bond YTD returns stand at 10.149%, the highest across fixed income and the best returns since 2016
The high yield energy index YTD returns were at 7.359%
BBs are the strongest performers, with YTD returns at 10.72%, followed by single Bs at 10.29%
CCCs YTD returns stand at 7.73%
Loans returns are at 6.016% YTD

(Market Watch) Distress in junk bond prices hit 6-month high in June

The U.S. junk-bond market may be flashing a new warning that the credit cycle is nearing its end.
About $52.5 billion of corporate bonds issued by U.S. companies with “junk” credit ratings were trading in June at prices below 70 cents on the dollar, the highest amount in six months, according to a J.P. Morgan note.
Bonds that trade below par, or face value, can signal concerns about the ability of a borrower, or area of industry, to service its debts. Riskier companies that don’t qualify for top investment-grade ratings are already categorized as high-yield, or junk credits.
While distressed bonds in June were just 4.3% of the over $1.2 trillion U.S. junk-bond market, the last time the volume was higher was December.
Back then, U.S. debt and equity markets were reeling from a sharp selloff, which was sparked by fears that the Federal Reserve would keep raising rates, even through the U.S. economy was showing signs of slowing.
Almost half of the sub-$70 high-yield bonds in June were from the energy sector, while telecommunications added another 21% and health care contributed about 12%, according to J.P. Morgan data.
There have been growing concerns about slowing manufacturing in the U.S. and around the potential for sweeping health care reforms if a Democratic candidate ends up seizing the White House from Donald Trump.

(Globe Newswire) Teleflex Announces Publication of a Large Real-World Study

Teleflex Incorporated announced the publication of positive results from a multi-center study reaffirming the safety and effectiveness of the minimally invasive UroLift® System for the treatment of benign prostatic hyperplasia (BPH) in real-world patient populations. This is the largest, most comprehensive study to examine a minimally invasive BPH procedure in a real-world setting. Results were published in the Journal of Endourology.
The Real-World Retrospective study was designed to evaluate the safety and effectiveness of the UroLift System in a real-world setting and to determine whether clinical outcomes are consistent with those found in controlled studies. The multi-center, retrospective study examined the results of 1,413 consecutive patients who received the UroLift System treatment over two years across 14 sites in North America and Australia.
“Not only are the real-world results from this large, multi-center study consistent with the L.I.F.T study, this study also provides data in populations of patients who were not studied in the L.I.F.T study but are seen in a real-world clinic setting,” said Gregg Eure, M.D., urologist at Urology of Virginia in Virginia Beach, Virginia, a lead investigator and co-author of the study. “These findings should give urologists and patients the confidence to adopt the UroLift System within the broader BPH population.”
The randomized L.I.F.T. clinical trial demonstrated that treatment with the UroLift System provides patients rapid and durable symptom relief. The minimally invasive procedure, which works without cutting, heating, or removing prostate tissue, demonstrates an excellent safety profile. Unlike BPH thermal therapies such as the most recent steam treatment, the real-world results for the UroLift System treatment showed complication rates and a patient experience that were consistent with controlled clinical trials.

(Reuters) U.S. House seeks documents from companies that run immigrant detention centers

- Lawmakers in the U.S. House of Representatives said they have sent letters seeking documents and information from three companies responsible for detaining illegal immigrants arrested by U.S. immigration agents.
- The House Oversight Committee and its House Subcommittee on Civil Rights and Civil Liberties sent letters to CoreCivic Inc, Geo Group Inc, and DC Capital Partners LLC seeking information about the facilities they operate under contract from the U.S. government.
- “The committee is investigating the Trump administration’s rapidly increasing use of for-profit contractors to detain tens of thousands of immigrants, including a troubling series of reports of health and safety,” Representatives Elijah Cummings and Jamie Raskin wrote in the letters.
- The two Democrats said the Trump administration had “dramatically escalated” spending on contracts with for-profit companies that operate detention centers.
- In a separate letter to ICE, the two lawmakers asked for copies of the contracts with the three companies and documents detailing how ICE ensures that contractor-operated detention centers comply with standards set by the Department of Homeland Security.

(Reuters) SunTrust to stop financing private U.S. prison operators

SunTrust Bank will stop financing operators of private prisons and immigration holding facilities, it said on Monday, becoming the latest lender to distance itself from a sector associated with the Trump administration’s policies.
Banks have been under pressure to cut ties with the private prison industry since U.S. President Donald Trump’s restrictions on immigration raised concerns about detention center conditions. The centers account for about two-thirds of the people held by U.S. Immigration and Customs Enforcement, S&P Global Ratings estimated last year.
Earlier this year, Wells Fargo, JPMorgan Chase & Co and Bank of America made similar commitments to phase out relationships with private prison companies.
Executives of big banks have been confronted by activists at annual shareholder meetings and grilled by lawmakers about their role in the industry. Private prison operators have argued that activists mischaracterize the nature of their facilities.
“It’s unfortunate that misleading political activism has been allowed to impact a decade-long banking relationship,” said Geo Group spokesman Pablo Paez.

(CNBC) President Trump gives executive order to transform kidney care

The executive order lays out ambitious goals for shifting 80% of patients currently on kidney dialysis out of high-cost clinic settings to more convenient and cost-effective home care by the end of the next decade.
Yet the details of the proposal for achieving that goal appear to be far less threatening to the major dialysis providers than initially feared by many investors.
The executive order proposes a 3% increase in home care dialysis reimbursement in the first year of a voluntary Medicare demonstration program, starting in 2020, but that extra boost would phase out over the three-year course of the initiative.
Combined, Davita and Fresenius control more than 80% of the kidney dialysis market with the largest share of their revenues and profits coming from their dialysis clinics.

05 Jul 2019

High Yield Weekly Rich Balestra - Portfolio Manager 0 comment

CAM High Yield Weekly Insights

CAM High Yield Market Note

7/5/2019

(Bloomberg) High Yield Market Highlights

Retail funds estimated to have received $885m through Tuesday, JPMorgan strategists wrote, citing Lipper data. High-yield bond ETFs recorded inflows of ~$1b in the last four sessions, data compiled by Bloomberg show.
Issuance slowed ahead of the Fourth of July holiday and is expected to resume next week
Returns rebounded in a holiday-shortened session Wednesday across ratings, with BBs leading the rally.
Spreads tightened and yields dropped in thin trading
U.S. high yield trading on July 3 was the slowest day in 2019 and volumes dropped the most in almost three months
YTD returns climbed back again to close at 10.257% from 10.146%
BBs are still the best performers, with a YTD return of 10.832%, followed by single Bs at 10.42%
Triple-C YTD returns stand at 7.68%
Loans lag bonds with YTD returns of 5.83%

(Wall Street Journal) Oil-Field Services Firm Seeks Chapter 11

Weatherford International said it would file for bankruptcy protection after bondholders approved a restructuring agreement that will reduce its total debt by about 70%.
The company said it expected to file its chapter 11 petition in U.S. Bankruptcy Court in Houston in what would be one of the biggest oil patch bankruptcies in years.
Unsecured bondholders are in line to get all but 1% of the equity in the reorganized business, while shares in the existing company will be canceled.
Weatherford, which has about 26,000 employees world-wide, had said in May that it planned to file for bankruptcy after having reached an agreement with creditors holding 62% of its bond debt. The balance-sheet restructuring will reduce its total debt to about $2.5 billion from $8.3 billion, nearly all of which is made up of unsecured bonds. Under the proposed plan, which requires court approval, the bondholders are expected to recover about 63% of what they are owed based on the proposed valuation of the company. Weatherford blamed its bankruptcy filing, in part, on volatility in oil and natural gas prices.
As oil-and-gas companies’ spending on exploration, development and production of oil and natural gas has decreased, so has demand for Weatherford’s services and products, the company said in a filing with the Securities and Exchange Commission. Weatherford said its cash flows from operations have been negative the past three fiscal years.

(Wall Street Journal) OPEC Agrees to Extend Output-Cut Pact

OPEC agreed to roll over its production cuts into the first quarter of 2020, the cartel’s officials said, but the new pact exposed deepening geopolitical fractures among members of the group.
The discussions over long-term cooperation plans highlighted the risks of the cartel’s alliance with Russia: OPEC needs the partnership to compete with U.S. shale producers, but longstanding members say they feel ostracized by the alliance.
OPEC reached a consensus on oil output without much drama Monday, but the cartel hit an impasse when it sought agreement on whether it should continue working with Russia and its allies to balance oil markets once the nine-month plan expires.
Iran initially objected, but after talks lasting five hours and involving a separate meeting between Iranian and Saudi officials both sides reached a compromise on long-term cooperation with Russia, OPEC officials said.
Over the weekend, Russian President Vladimir Putin revealed that Saudi Arabia — OPEC’s de facto leader — and Russia had already agreed to maintain the output cuts at current volumes, which run at around 1.2 million barrels a day. The news left some in OPEC feeling overshadowed by two of the world’s largest oil producers, OPEC officials said.

(Bloomberg) T-Mobile on Cusp of Justice Department Approval for Sprint

T-Mobile U.S. Inc. is on the cusp of securing U.S. Justice Department approval for its $26.5 billion merger with Sprint Corp., after establishing the general outlines of asset sales to Dish Network Corp., according to people familiar with the matter.
The Justice Department is hammering out final issues with T-Mobile on an agreement aimed at ensuring Dish can become a strong fourth competitor in the U.S. wireless market, said the people, who asked to not be identified because the matter isn’t public. While the sticking points aren’t insurmountable, the Justice Department has yet to bless the arrangement to allow Sprint’s acquisition to proceed.
T-Mobile is trying to offer just enough concessions to gain approval but not so many that it creates a formidable rival while the Justice Department is aiming to maximize competition, the people said.

14 Jun 2019

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 $1.7 billion and year to date flows stand at $10.0 billion. New issuance for the week was $6.5 billion and year to date HY is at $113.2 billion, which is +19% over the same period last year.

(Bloomberg) High Yield Market Highlights

Junk bonds look susceptible to weakness in stock futures and oil, following gains in the prior session amid fund inflows.
Junk yields dropped, spreads tightened across ratings yesterday amid equity and oil strength
Lipper’s reported inflow into U.S. high yield funds was the biggest in 10 weeks
Investors demanding appropriate risk premium was evident in pricing of US Renal Care‘s CCC-tranche
Priced at the wide end of talk to get investors on board and changed issuer-friendly covenants to protect investors
Junk bond returns YTD stood at 8.89%
BBs were at YTD peak of 9.229%
Single-Bs at 8.986%
CCCs stood at 7.106%
Energy returns turned negative for the second straight session, with YTD dropping to 6.089%
Loans were at 5.698%

(Reuters) Trump blames Iran for tanker attacks, stoking fears of confrontation

S. President Donald Trump blamed Iran on Friday for attacks on two oil tankers at the entrance to the Gulf despite Tehran’s denials, stoking fears of a confrontation in the vital oil shipping route.
Iran has dismissed earlier U.S. charges that it was behind Thursday’s attacks that crippled two tankers and has previously threatened to block the Strait of Hormuz, through which a fifth of globally consumed oil passes, if its oil exports were halted.
Thursday’s blasts followed a similar attacks a month earlier on four tankers, which Washington also blamed on Tehran.

(Bloomberg) Dish, Charter and Altice Eye T-Mobile and Sprint Assets

Dish Network Corp., Charter Communications Inc. and Altice USA Inc. are among bidders for assets T-Mobile US Inc. plans to sell to win regulatory approval for its $26.5 billion takeover of Sprint Corp., according to people familiar with the matter.
The companies are on a shortlist of bidders favored by the Justice Department, said the people, who asked to not be identified because the matter isn’t public. The antitrust division would be comfortable with cable companies buying the assets because they are better positioned to become viable competitors with their own networks, one of the people said.
T-Mobile and Sprint have agreed to sell prepaid wireless brand Boost to appease the Federal Communications Commission, which also has to approve the deal. To win over the Justice Department, the companies are also discussing offloading another prepaid brand and enough spectrum to help set up a viable fourth competitor if the deal goes through.
They are working with a shortlist of potential buyers acceptable to the Justice Department with the aim of having the antitrust enforcer sign off on the winner as part of their approval efforts, the people said.

(Business Wire) The GEO Group Amends Senior Revolving Credit Facility Extending Maturity to May 2024; Size and Pricing Remain Unchanged

The GEO Group announced the closing of an extension and amendment to its Senior Revolving Credit Facility. The maturity for the amended Revolver has been extended to May 17, 2024. The borrowing capacity under the amended Revolver will remain at $900 million, and its pricing will remain unchanged currently bearing interest at LIBOR plus 2.25%.
GEO currently has approximately $492 million in outstanding borrowings along with approximately $62 million set aside for letters of credit under the amended Revolver, leaving approximately $346 million in available borrowing capacity.
George C. Zoley, GEO’s Chairman of the Board, Chief Executive Officer and Founder, said: “The extension and amendment of our senior revolving credit facility, with consistent terms and unchanged pricing, is indicative of our long-standing ability to access cost-effective capital. Our amended revolver will position our company to continue to pursue quality growth opportunities. We remain optimistic about the strong fundamentals and the increasing demand for our high-quality services across GEO’s diversified business segments.”

07 Jun 2019

Investment Grade Weekly, Uncategorized Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly
6/7/2019

It was a bit of a see-saw week in the corporate market as the tone was very heavy on Monday but sentiment turned decidedly more positive on Tuesday and remained so throughout the rest of the week. The OAS on the corporate index opened the week at 128 and widened to 130 going into Tuesday morning but we sit back at the 128 level as we go to print on Friday morning. The biggest story of the week is Treasury yields, which are lower across the curve for the second consecutive week. The 10yr Treasury is over 5 basis points lower on the week and sits at its lowest level of 2019 and the lowest levels we have seen since September 2017.

$23.4bln in new corporate debt was brought to the market this week. New issue concessions remain low, having averaged 3.5bps thus far in 2019 according to data compiled by Bloomberg. Of course, every deal is different and some deals have enjoyed more substantial concessions than others. Year-to-date corporate supply has crossed the half trillion mark and sits at $511.1bln, which lags 2019 issuance by over 9% according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of May 30-June 5 were +$6.2bln. This brings YTD IG fund flows to +$125bln. 2019 flows to this juncture are up 4.8% relative to 2018.

(Bloomberg) Fiserv’s Expected Jumbo M&A Deal Makes an FX Pivot

A highly-anticipated Fiserv jumbo M&A bond deal never materialized Thursday as the company announced plans for a European roadshow, calling into question how big the dollar leg will be. Many had expected up to a $12 billion transaction funded solely in the U.S. currency. Meanwhile, two deals moved forward pricing $810 million.
While it didn’t bring a deal, Fiserv did, unexpectedly, announce a EUR and/or GBP roadshow just as Mario Draghi was declaring that the ECB won’t shy away from action to support the euro-area economy during a period of weakening growth. A dovish ECB and low rates potentially going lower may have contributed to Fiserv’s decision to test alternative currencies. We have seen a surge in reverse yankee issuance for exactly this reason
The stage seemed set for Fiserv to bring high-grade’s first jumbo deal since Bristol-Myers and IBM priced nearly $40b in acquisition-related funding for Celgene and Red Hat, respectively. Equity futures were in the black, IG CDX opened tighter and Wednesday’s two biggest deals from HCA and Parker-Hannifin were trading though new issue levels after achieving strong primary pricing outcomes. From an economics perspective, if you’re a believer in the correlation of ADP and nonfarm payrolls, Thursday offered a brief window ahead of a potentially weak jobs report. This, all amid an irrefutably stronger primary market backdrop that had steadily improved over the week.
Should Fiserv elect to predominantly tap the European debt capital markets it will be the second time in under a month that an issuer bringing an M&A deal has gone overseas for the majority of the funding. Fidelity National Services elected to fund just USD1b after launching EUR5b and GBP1.25b for their Worldpay acquisition. People with knowledge of the deal expected a much larger greenback portion. So much so that the USD-leg was more than 8 times oversubscribed in less than two hours.

(Bloomberg) U.S. Payrolls, Wages Cool as Trade War Weighs on Economy

S. employers added the fewest workers in three months and wage gains cooled, suggesting broader economic weakness and boosting expectations for a Federal Reserve interest-rate cut as President Donald Trump’s trade policies weigh on growth.
Nonfarm payrolls rose 75,000 in May after a downwardly revised 224,000 advance the prior month, according to a Labor Department report Friday. The increase missed all estimates in Bloomberg’s survey calling for 175,000. The jobless rate held at a 49-year low of 3.6% while average hourly earnings climbed 3.1% from a year earlier, less than projected.
The dollar and Treasury yields fell as the data signaled the labor market — a pillar of strength for an economy headed for a record expansion — was facing new pressures even before Trump threatened tariffs on Mexican goods in addition to proposed higher levies on Chinese imports. Retail sales, factory output and home purchases have shown the economy struggling this quarter after better-than-expected growth in the first three months of the year.

(Forbes) Intel Charts A New Course With 10th Gen Core And Project Athena

Likely the most anticipated product that Intel revealed at Computex was its 10th Gen Core processors code-named Ice Lake. These 10th Gen Core processors utilize a new Sunny Cove CPU architecture and are built with Intel’s much awaited 10nm process node, which previously had some issues regarding yields that Intel claims are now resolved. Intel says these issues are behind them and that we can see volume production of 10nm with this 10th Gen of Core processors. These new Ice Lake processors also feature the new Gen11 graphics chip, which should elevate Intel’s performance in integrated graphics further to enable even better entry-level gaming. The 10th Gen Core processors announced at Computex range from Core i3 up to Core i7, with up to 4 cores and 4.1 GHz max turbo frequency. These processors target 2-in-1 and thin and light laptop form factors, so having a 4.1 GHz max turbo frequency AND 1.1 GHz GPU frequency is quite impressive.
Intel claims the Iris Plus graphics inside of the 10th Gen core processors (based on their Gen11 graphics) provide double the performance over the previous generation in some benchmarks. The company also claims double the HEVC encode performance, which should help with creative people wanting to do on-the-go video editing. Additionally, Intel claims double the FPS in 1080P games. While this would obviously be a pretty significant improvement, it will likely depend heavily on how the thermals are managed by the device manufacturer and over what period.
Intel also integrated both Thunderbolt 3 and Wi-Fi 6 into the 10th Gen Core processors, which is a pretty big deal for those who care about connectivity. Wi-Fi 6, formerly known as 802.11AX, is the future of Wi-Fi and will bring significant improvements to the quality of service, performance, and efficiency. Intel and others are doing the industry a favor by aggressively pushing the standard. Integrating Wi-Fi 6 will help to increase the adoption of Wi-Fi 6 and improve the user experience of PC users. The more users with Wi-Fi 6 devices on a Wi-Fi 6 network, the more efficient the network becomes. Everyone’s speeds (including non-Wi-Fi 6 users) go up. There are also coverage and quality benefits to Wi-Fi 6, but those are more dependent on the access point. Thunderbolt 3’s integration is also important because it is an incredibly versatile high-bandwidth interface that helps improve a device’s modularity with things like docks, displays, and drives.
OEMs will launch systems with the 10th Gen Core processors this holiday season, which is a bit later than one would expect with a May announcement. With the new process node and design principals, the 10th Gen Core processors are poised to usher the company into a new era.

(Bloomberg) Duke Energy Gets Nod From Indiana Regulator for Solar Pilot

Duke Energy received approval from the Indiana Utility Regulatory Commission for a pilot program that allows some customers lease solar energy facility from Duke for up to 20 years.
- Initial capacity limited to total of 10 megawatts for customers
- Duke installs, operates, owns and maintains facility
- Customers receive all of the kilowatt-hour output of solar energy equipment through net-metering arrangement

07 Jun 2019

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 -$1.8 billion and year to date flows stand at $8.2 billion. New issuance for the week was $3.2 billion and year to date HY is at $106.7 billion, which is +16% over the same period last year.

(Bloomberg) High Yield Market Highlights

S. junk bonds have positive momentum after three straight days of gains despite the biggest fund outflows since December. Rising oil and equity markets are supportive and all eyes are on this morning’s U.S. employment report for clues on the strength of the economy.
The primary looks to be wide open after a number of borrowers, including first-time issuer GrubHub, increased the size of offerings this week
Five of the seven deals priced this week were drive-by deals, signaling that junk investors were scrambling for supply
Risk assets got a boost yesterday from reports that U.S.- Mexico talks were progressing towards a deal
This followed Chair Powell reiterating earlier this week that the central bank is standing by to act if the trade war causes disruption
Junk bond YTD returns are 8.117%, the best asset in fixed income
BBs were at 8.344%
Single-B stood at 8.19%
CCCs were still the worst performers at 6.767% YTD
Loans were at 5.578%
Investment grade bonds were at 7.376%

(CAM Note) Moody’s Downgraded the Debt of Tenneco by One Notch

The senior unsecured debt is now rated B3.
Moody’s cited an expected slower pace of deleveraging, weaker financial performance, and a soft auto production environment.

(Business Wire) The GEO Group Negotiating with State of Victoria to Increase Capacity at the Ravenhall Correctional Centre by 300 Beds

The GEO Group, Inc. announced that its subsidiary, The GEO Group Australia Pty Ltd (“GEO Australia”) is currently in negotiation discussions with the State of Victoria to increase the capacity at the Ravenhall Correctional Centre by an additional 300 beds increasing the Centre’s capacity to 1,600 beds. The 300-bed capacity increase is expected to generate incremental annualized revenues of $19 million.
The Ravenhall Correctional Centre was developed by a GEO led consortium. The $700 million project was financed under a Public-Private Partnership structure, which included a capital investment from GEO of approximately $90 million with returns on investment consistent with GEO’s company-owned facilities. GEO Australia operates the Centre, which opened in late 2017, under a 25-year contract with the State of Victoria.
George C. Zoley, Chairman of the Board and Chief Executive Officer of GEO, said: “We appreciate the trust placed in our company by the State of Victoria, which is a reflection of our partnership with the State since 1999 with the opening of the Fulham Correctional Centre. We are looking forward to working with the Department of Justice and Community Safety to further strengthen our longstanding partnership.”

(Market Watch) Junk bond canary soothes fears around yield curve recession signal

The muted selloff in the market for high-yield corporate debt brings some calm to investors rattled by the Treasury market’s potential signal of a recession.
Analysts skeptical of calls for a trade-induced economic downturn say the resilience of so-called junk bonds shows the U.S. expansion has room to run, and that the growth worries emanating from an inversion of the Treasury yield have gone too far.
In recent weeks, the Trump administration’s stridency in pursuing more protectionist trade policies, imposing tariffs on China and threatening to slap levies on Mexico, have cast a shadow over the U.S. economy, on course for its longest period of sustained growth in post-World War II history.
“So far, credit spreads have remained well behaved, which also suggests to us that the probability of an imminent slowdown is not high,” said Sean Darby, chief equity strategist for Jefferies.
One reason why some market watchers are dismissing the yield curve’s recession warning is because its predictive powers come from its ability to detect when businesses struggle to find credit. But debt-bloated firms have continued to issue bonds this year, suggesting financial conditions still remain supportive of growth.

24 May 2019

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 $0.02 billion and year to date flows stand at $12.5 billion. New issuance for the week was $7.2 billion and year to date HY is at $102.1 billion, which is +16% over the same period last year.

(Bloomberg) High Yield Market Highlights

Junk bonds will draw support from stabilizing equity and oil markets today, helped by better fund flows, after the heaviest bout of issuance in 14 months. Futures point to a firm open, following a bruising week for risk assets.
Yesterday’s close was the lowest since March 8
Futures on the S&P 500, Dow Jones and Nasdaq rose today in the wake of steep declines a day earlier
Oil’s also opening firmer this morning, after suffering the biggest weekly drop since December
However, concerns are mounting that the trade dispute could cripple global growth
S. corporate high-yield funds swung to a small inflow of about $20mm for the week
High-yield index fell 0.25% yesterday, the biggest loss since May 13
Spread widened 10bps to 398bps
Index yield rose to 6.38% from 6.35%
The junk market is digesting $25b in new bonds, the most monthly supply since March 2018

(The Street) Sprint-T-Mobile US Merger Gets FCC Approval After 5G Network Development Pledge

Sprint Corp. and T-Mobile shares surged Monday after U.S. Federal Communications Commission chairman Ajit Pai said he would recommend approval of their $26 billion merger plans.
The FCC agreed to the tie-up following pledges from both companies to build 5G networks around the country, while ensuring “robust” infrastructure in rural areas, and to also enhance in-home broadband offerings to its customer base.
“Two of the FCC’s top priorities are closing the digital divide in rural America and advancing United States leadership in 5G, the next generation of wireless connectivity,” Pai said in a statement. “The commitments made today by T-Mobile and Sprint would substantially advance each of these critical objectives.”
“I’m also pleased that the companies have committed to a robust buildout of their mid-band spectrum holdings,” he added. “Demonstrating that 5G will indeed benefit rural Americans, T-Mobile and Sprint have promised that their network would cover at least two-thirds of our nation’s rural population with high-speed, mid-band 5G, which could improve the economy and quality of life in many small towns across the country.”

(Globe Newswire) Toll Brothers Reports FY 2019 2nd Quarter Results

Toll Brothers, Inc., the nation’s leading builder of luxury homes, announced results for its second quarter ended April 30, 2019.
Net income and earnings per share were $129.3 million and $0.87 per share diluted, compared to net income of $111.8 million and $0.72 per share diluted in FY 2018’s second quarter.
Pre-tax income grew 15% to $176.2 million, compared to $152.7 million in FY 2018’s second quarter.
Home sales revenues were $1.71 billion, up 7%; home building deliveries were 1,911, up 1%.
Net signed contract value was $2.00 billion, down 16%; contract units were 2,424, down 9%.
Backlog value at second-quarter end was $5.66 billion, down 11%; units in backlog totaled 6,467, down 8%.
Home sales gross margin was 19.7%; Adjusted Home Sales Gross Margin, which excludes interest and inventory write-downs (“Adjusted Home Sales Gross Margin”), was 23.5%.
Douglas C. Yearley, Jr., Toll Brothers’ chairman and chief executive officer, stated: “We are pleased with this quarter’s results, which exceeded our expectations for revenues, margins, and profits. Revenues, net income and earnings per share rose 7%, 16%, and 21%, respectively, compared to one year ago.
“We are encouraged by the improvement in demand as the quarter progressed. FY 2019’s April contracts surpassed FY 2018’s April on both a gross and per-community basis. Although the Spring selling season bloomed late, it built momentum. We view this as a positive sign for the overall health of the new home market.
“We continue to look for opportunities to grow and leverage our industry-leading brand as we expand our geographic footprint, product lines, and price points. Yesterday, we announced our entry into metro Atlanta with the acquisition of Sharp Residential. Atlanta was the largest U.S. housing market where we did not operate, and Sharp was one of Atlanta’s largest private home builders. This quarter we also opened our first communities in Salt Lake City, Utah and Portland, Oregon, which are markets we have entered organically and where we are already seeing healthy buyer interest.
“According to recent reports, builder sentiment in May rose to a 7-month high and single-family housing starts in April were up 6.2% versus March. The industry is being buoyed by low interest rates, a strong employment picture, and a still-limited supply of new homes in many markets. With a positive macroeconomic backdrop, record low unemployment, continued wage growth, and solid consumer confidence, we are optimistic about the opportunities ahead.”

17 May 2019

Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

CAM Investment Grade Weekly
05/17/2019

The tone in the credit markets was mixed this week. The market felt heavy on Tuesday amid trade ramifications but by the time Thursday rolled around the tone was quite strong. All told it looks as though we will finish the week relatively unchanged as far the spread on the index is concerned. There are more negative headlines regarding China trade as we go to print on Friday which is leading to weakness in equity markets while Treasury’s are gaining. The 10yr is modestly lower on the week and remains below 2.4% on Friday morning.

Just under $30bln in new corporate debt was brought to the market this week. Demand for new issuance has been solid and thus concessions were low, in the neighborhood of 3-5 basis points for most deals. Year-to-date corporate supply is up to $468bln, which lags 2019 issuance to the tune of -6.3% according to data compiled by Bloomberg.

According to Wells Fargo, IG fund flows during the week of May 9-May 15 were +$4.2bln. This brings YTD IG fund flows to +$114bln. 2019 flows to this juncture are up 4.43% relative to 2018.

(Bloomberg) Bond Traders Need to Up Their Game as AI Systems Get Smarter

Money is pouring into artificial intelligence in bond markets, challenging bankers and investors to adapt their skills in everything from issuing to trading securities.
Fintech startup Nivaura is investing in technology to automate debt sales. Dutch bank ING Groep NV is improving systems to help traders buy and sell bonds, while AllianceBernstein Holding LP advanced its virtual assistant to identify notes that people miss.
After taking over stocks, computers are slowly overcoming resistance in one of the most technology-averse corners of financial markets. Bond traders are wary of a one-size-fits-all approach coming from equity markets, which are now largely automated. They say that human relationships are at the center of the market and clients want to talk through complex transactions.
AI has proved particularly useful in replacing manual tasks such as inputting data and executing small, liquid trades in markets such as currencies. It’s only just beginning in areas like corporate bonds, that traders call “high touch” for the traditional level of human involvement.
Still, proponents say tech is being used as a tool by people rather than a replacement for them and that it helps firms use human resources more efficiently.

(Bloomberg) In a Tariff-Muddled World, U.S. Treasuries Send a Clear Message

Investors are wrestling with mixed U.S. data, underwhelming global growth, and an escalating trade war. While other asset classes have telegraphed optimism, sovereign debt is signaling a degree of caution, if not abject fear, about what comes next.
While U.S. stocks are barely down on the week through Thursday after collapsing on Monday, Treasury yields are decisively lower. Bund yields aresolidly sub-zero. Chinese sovereign debt is being heralded as a clear winner in the clash over cross-border commerce.
Another note of caution for Treasury bulls betting on an extension of the rally: expectations that the Federal Reserve is poised to ease – and perhaps materially – by the end of 2020 has helped juice the rally in longer-term debt. But patience – the central bank’s mantra – is almost definitionally incompatible with a proactively accommodative posture.
Even Minneapolis Fed President Neel Kashkari – arguably the most dovish member of the FOMC – does not think a so-called “insurance” rate cut is appropriate. A more hawkish member – Kansas City chief Esther George – thinks a rate reduction could fuel financial excesses.
If the market switched to betting the Fed will stay on hold this year, and if 10-year yields moved in lock-step with fed funds futures, then 10-year Treasuries would be north of 2.60% and trading closer to the 2019 highs than the trough.

(Bloomberg) Walmart Rallies on Plan to Pass on Cost of Tariffs to Consumers

Comparable sales for Walmart stores in the U.S. climbed 3.4% in the first quarter, its best for the period in nine years. Sales of groceries — Walmart’s biggest business — fueled the increase, and a later-than-usual U.S. flu season boosted health and wellness products. The shares rose as much as 4.1% Thursday in New York, the biggest intraday gain in almost three months.
Walmart’s response to potential higher levies will likely set the tone for other discount retailers, and its decisions on whether to pass along or absorb the additional costs will have ripple effects on American consumers. In its favor, Walmart’s clout with suppliers gives it more room to maneuver, and much of its food comes from U.S. sources, easing the impact.
“We will do everything we can to keep prices low, but increased tariffs lead to increased prices,” Chief Financial Officer Brett Biggs said in a Thursday morning interview. “It’s very item- and category-specific. There are some places where as we get tariffs, we will take prices up.” Finding alternative manufacturers “is one of a number of actions that our merchants are considering.”
Walmart’s response to potential higher levies will likely set the tone for other discount retailers, and its decisions on whether to pass along or absorb the additional costs will have ripple effects on American consumers. In its favor, Walmart’s clout with suppliers gives it more room to maneuver, and much of its food comes from U.S. sources, easing the impact.
“We will do everything we can to keep prices low, but increased tariffs lead to increased prices,” Chief Financial Officer Brett Biggs said in a Thursday morning interview. “It’s very item- and category-specific. There are some places where as we get tariffs, we will take prices up.” Finding alternative manufacturers “is one of a number of actions that our merchants are considering.”

17 May 2019

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 -$2.5 billion and year to date flows stand at $12.5 billion. New issuance for the week was $4.0 billion and year to date HY is at $94.9 billion, which is +12% over the same period last year.

(Bloomberg) High Yield Market Highlights

S. junk bonds gained 0.19% yesterday, the most in 7 weeks, as stocks rallied and the VIX fell. This morning’s equity retreat and the biggest fund outflows since December call into the question the sustainability of the move higher.
Junk bond yields dropped across ratings, with the biggest decline in 5 weeks, but nervous investors pulled cash out of retail funds for a second week
Lipper reported an outflow of $2.57b from U.S. high yield for week ended May 15, the most since December, amid trade war jitters
Berry Global is set to price a smaller than expected deal today
Three new deals priced yesterday. All priced at the lower end talk
Junk bond energy saw the best performance in 6 weeks after posting losses for more than 10 weeks, with 0.25% yesterday
High-yield energy YTD return was 8.67%
High-yield returns ex-energy also turned positive, with YTD at 8.086%
BBs at 7.99%, single-Bs 8.25%
CCCs at 7.964% YTD
Loans lag junk bonds, with a 5.67% YTD gain

(Reuters) U.S. states accuse Teva, other drugmakers, of price-fixing: lawsuit

S. states filed a lawsuit accusing Teva Pharmaceuticals USA Inc of orchestrating a sweeping scheme with 19 other drug companies to inflate drug prices – sometimes by more than 1,000% – and stifle competition for generic drugs, state prosecutors said on Saturday.
Soaring drug prices from both branded and generic manufacturers have sparked outrage and investigations in the United States. The criticism has come from across the political spectrum, from President Donald Trump, a Republican, to progressive Democrats including U.S. Senator Elizabeth Warren, who is running for president.
The 20 drug companies engaged in illegal conspiracies to divide up the market for drugs to avoid competing and, in some cases, conspired to either prevent prices from dropping or to raise them, according to the complaint by 44 U.S. states, filed on Friday in the U.S. District Court in Connecticut.
“The allegations in this new complaint, and in the litigation more generally, are just that – allegations,” Teva said in a statement. “Teva continues to review the issue internally and has not engaged in any conduct that would lead to civil or criminal liability.”
“Apparently unsatisfied with the status quo of ‘fair share’ and the mere avoidance of price erosion, Teva and its co-conspirators embarked on one of the most egregious and damaging price-fixing conspiracies in the history of the United States,” the complaint said.

(Bloomberg) Looming U.S. Junk Bond Risk May Shrink With Fed’s Help

One of the biggest risks in the junk bond market is showing signs of diminishing, with help from the Federal Reserve.
Nearly a third of the $1.2 trillion U.S. high-yield market matures in the next four years, a record high proportion, according to Barclays Plc strategists led by Bradley Rogoff. Junk-rated companies have to refinance that debt, pay it off, or face bankruptcy.
They have years to sort out that risk, but many are doing it now: companies have issued more than $80 billion of bonds this year that listed refinancing as one of the uses of proceeds, according to data compiled by Bloomberg, accounting for more than 70% of issuance this year.
“Companies are extending maturities out, and that’s healthy,” said Scott Roberts, head of high-yield debt at Invesco Ltd. Refinancing is a better use of debt than buying back shares, he added. “I’ve seen frothy before and this is not it.”
Corporations have ample incentive to deal with future debt maturities soon: on average they can reduce interest costs by issuing securities at current yields, the Barclays strategists said. Those relatively low borrowing costs are in part because of the Fed, which has paused its rate hikes, spurring money managers to pile into junk bonds in search of yield. Even with recent declines in high-yield securities, the debt has gained 8.3% this year through Friday, according to Bloomberg Barclays index data.
“I feel good about this high-yield market and we are trying to push issuers to take advantage of it,” said Richard Zogheb, global head of debt capital markets at Citigroup Inc. “Investors are so excited now that the underlying rate environment is more dovish, and that’s really good news for high-yield borrowers.”
Investment bankers say companies are taking notice of the opportunities to issue, and not just for refinancing. Corporations sold around $12 billion of U.S. junk bonds last week, the highest level in around 20 months, according to data compiled by Bloomberg.

(Bloomberg) China Downplays Chances for Trade Talks While U.S. Plays ‘Little Tricks’

China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs, while the government said stimulus will be stepped up to buttress the domestic economy.
Without new moves that show the U.S. is sincere, it is meaningless for its officials to come to China and have trade talks, according to a commentary by the blog Taoran Notes, which was carried by state-run Xinhua News Agency and the People’s Daily, the Communist Party’s mouthpiece. The Ministry of Commerce spokesman said Thursday he had no information about any U.S. officials coming to Beijing for further talks.
The indications that negotiations are paused will focus attention on the next opportunity for Presidents Xi Jinping and Donald Trump to meet — at the Group of Twenty meeting in Japan next month. Their meeting in Argentina in December last year put negotiations back on track, only for them to fall apart again this month in Washington.
S. Treasury Secretary Steven Mnuchin said this week that American officials “most likely will go to Beijing at some point” in the near future to continue trade talks, before later saying he has “no plans yet to go to China.”

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