High yield corporate bonds are better today following Friday’s down day. Last week, Lipper reported another inflow into high yield mutual and exchange traded funds of $198mm for the week ending June 14th. New cash and a light new-issue market are keeping a bid in the secondary market. Moody’s reported a 3.3% default rate for the month of May and is estimating this to continue to fall in the coming months. Given this outlook, investors seemingly feel it is a safe place to clip interest income as corporate America is not overspending.
Oil continues to trade under $45 as more oil rigs (+6) came back online for the 22nd consecutive week. Iraq’s oil minister wants to raise their output and Libya is now producing 900K barrels a day vs. 320K last year. This added production may further soften prices in the near future even though demand is still increasing and we may see individual companies’ financials take a hit when the +$50 hedges begin to roll off. We recently saw some prominent hedge funds had trimmed their holdings in the top ten shale companies by several hundred million.
Housing starts came in at a -5.5%, when estimates were +4%, and the forward looking Building Permits came in at -4.9% which is a barometer of future building. Is it demographics settling into the housing numbers or is it something else? We have written for several years that the aging population in many countries, including the US, is a major factor in limiting growth in many industries as we move forward. Equity markets continue to set new highs, yet the 10-year Treasury yield has fallen below 2.15%, which seem to be sending mixed signals on the outlook for growth and economic strength.