High yield bonds are opening a bit lower this morning but that is pretty good given all of the uncertainties surrounding the US, the US economy and the markets. The US economy only added 103k jobs, but February was revised higher averaging the first quarter over 200k. The biggest thing credit investors were looking at is the wage growth and that came in as expected, so many are projecting the Fed will hold pat with three rate hikes in 2018.
Equities are lower this morning, fueled by the worry of what is happening to the continued banter between the US and China over trade. As per equities outside the US, could a renegotiated, more even trade agreement happen with China cause other nations to follow suit with China, and if so, will this cause a slowing in the Chinese economy and thus hurt investors who have holdings in international equities and funds?
Despite the volatility in equities, high yield has been pretty steady day to day. The new-issue market is functioning well as the 10-Year Treasury yield has eased from 2.96% a few weeks ago to the 2.79% today. This makes it a bit less expensive to bring debt to market for corporate America and we saw four new-issues for ~$1.75B in proceeds come to the market. There are three deals on the forward calendar and this year’s issuance is -21.5% below 2017 issuance so far.
Money is flowing into safe havens today and Treasury yields are dwn, while gold is up. Yesterday, oil traded into contango for the first time in five months so we shall see if this pattern holds in the coming weeks to gauge the direction of oil.
Outflows continued for the high yield asset class as Lipper reported a drawdown of -$573M in the week ending 4/4 from high yield mutual and exchange traded funds. This is the 11th outflow in the last 12 weeks, yet the high yield markets have been calm, unlike equities. Loans saw inflows +$285M for the latest reporting period and that makes it 10 out of 11 weeks of inflows.
The various high yield indexes are in negative territory for the year. However, we feel we are in an environment where active managers will be able to add alpha and buck the negative trend as we can pick specific securities in specific industries that we feel will do well in this uncertain world, rather than owning every industry and every security that is part of the underlying indexes.