High Yield Daily Update

High yield bonds are mirroring equities today with a positive open, even though the 10-year Treasury yield is up 3 bps.  The Dow ended Friday’s trading session in “correction” territory as it was down 10% from its high, but we are seeing a rebound today.

The consensus from last week from the Fed speak is that they will raise three times this year and three next year bringing the Fed Funds rate to ~3%, but where will this put the 10-year Treasury yield?  Many say it will top at 3 ¼% – 4% as the yield curve will flatten.  If this outlook were to come to pass, which would be predicated on an improving economy, we believe that high yield bonds will do well given their higher coupons and lower duration and average maturities than many other fixed income classes.

PPI (producer price index) and CPI (consumer price index) report this week and earnings begin so that will give a good indication of where this economy is heading, or is old man winter going to be an excuse of why we need to wait another month or two.  An example of winter’s effects on the economy, heating oil demand has been elevated, with total product demand at the highest level since at least 1990, according to the EIA.  This means people are consuming more of this source of fuel, thus potentially cutting into personal spending.

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