While the Bloomberg Barclays US High Yield Corporate Index was up 0.08% yesterday*, we are seeing the high yield bond market weaker today as volatility has picked up in equities, putting them much lower. Weaker than expected nonfarm productivity and unit labor costs has Treasury yields lower across all maturities. Two high yield bond new-issues came to market yesterday for $900M in proceeds, with only three in queue. We expect this should pick up as Treasury yields have eased and the blackout period for earnings season passes.
As we look at some of Moody’s statistics, we see a pretty healthy corporate America for high yield issuers. The number of companies rated B3- or lower is down 22% from a year ago and they expect the US speculative grade default rate to go to 1.7% by March of 2019.
The markets are nervous about the China trade meetings and I think they are taking a page out of President Trump’s negotiating book, where you voice a strong stance but when you get into a room and you are the one that has lots of downside, you negotiate. An example of bets each side has made: China has stopped buying U.S. soybeans and the Pentagon has banned Chinese smartphones for our military. It is surprising to me that we even had them manufacture phones for the military given China’s history of stealing our technology—isn’t there the possibility they are loaded with tracking devices?