High Yield Daily Update

The Bloomberg Barclays US High Yield Index posted a return of 0.03% yesterday.* High yield bonds are better today on the heels of a calmer tariff climate following the meeting between the US and the EU.  Tech is getting slammed as Facebook did not meet expectations thus dragging down the NASDAQ.  Oil is higher on a big drawdown yesterday and it’s interesting that pirates are still disrupting our world: I read that Saudi Arabia temporarily halted oil shipments in the Bab el-Mandeb Strait after two tankers carrying 2 million barrels each came under attack by militants.

Durable Goods orders were below expectations but still point to strong corporate spending while Capital Goods orders beat expectations.  The more important Inventory number was flat, so nothing to gauge either way.  Our domestic economy seems to be in solid shape, but what about elsewhere?  If the world economy is doing so well why is the ECB still in the stimulus phase, still buying assets and hinting that the interest rate program won’t change until next summer?

No high yield bond new-issues came yesterday and that leaves four deals on the forward calendar for a total of ~$1.8B.  Earnings are kicking in, which means quiet periods are being implemented so the continued slow new-issuance pace will likely continue.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The Bloomberg Barclays US High Yield Index posted a return of 0.08% yesterday.*  High yield bonds, like most other markets, opened the day flat and quiet.  The VIX continued to fall yesterday as the dog days of summer weigh on the market volumes.  Most investors are watching for the headlines that will come out of the meeting between the US and the EU on trade tariffs, as well as the anticipated GDP number coming out on Friday.  New home sales continue to fall, with inventory and the Chinese pulling back on their buying as the catalysts.

The high yield bond market continues to have a bid in the secondary market as cash is flowing there with the absence of new-issues fueling that.  Some of the lack of new-issues is because many companies are issuing floating rate loans instead of bonds.  We will have more to say on this in our upcoming mid-year writing.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The high yield market was flat on Friday, with the Bloomberg Barclays US High Yield Index up 0.01% on the day, and we are opening the same today, as it is pretty quiet as usual here in the middle of summer.  There were net outflows on Friday, and Lipper reported an inflow into high yield mutual and exchange traded funds for the week ending 7-18-18, with the lion’s share coming into ETFs.

Earnings season kicks off in full force over the next week, with many high yield issuers among those announcing, so we expect we will see a continued lack of new issuance supply.  There was $3B issued last week and only ~$5.5B for the month which is the lightest July since 2008.

Oil is creeping toward $70/barrel again on President Trump and Iran’s strong talk and the rig count in the US fell by five last week.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The Bloomberg Barclays US High Yield Index was up 0.05% yesterday.1  High yield bonds, mainly the large on-the-run index names, are a bit weaker today as it is a bit of risk off day.  Backing this thesis is the 10-year Treasury yield fading to 2.85% from 2.88% yesterday.  Today will mark 21 straight trading days in the 2.80% – 2.89% range if this level holds.

Outflows from index tracking funds and the asset class overall are putting pressure on the secondary market and there are only a few new-issues on the forward calendar with two pricing yesterday for ~$1.2B.  Loans funds continue to see inflows and Lipper is anticipating the largest inflow in six weeks, but we believe investors need to beware.

There have been a ton of investors throwing cash at the floating rate loan market this year.  We think one of the biggest problems this cycle will be the collateralized loan obligations (CLOs).  While we see many attractive opportunities in the off the run loan market (which we view as a less efficient market, with more “orphaned” credits that aren’t widely followed), loans overall have been very popular and are sporting far more leverage than in past cycles.  The value of having a first lien in a 5-6x levered company may not be worth that much if it is the only debt outstanding, and for those credits that are impaired, the recovery rates may be well below historical averages.  So this potentially may be a far bigger mess down the road, and may create even more opportunity once it begins to unravel.  We see a good amount of “research” discussing moving senior into loans but that is a misnomer in many cases.  Tourists in that asset class need to be aware.  Loans are simply another great opportunity set; there are lots of good ones and lots of bad ones.

There is always value in the market but we believe that where we are in the cycle, investors should be bond/loan pickers.  According to JP Morgan, there are $381bn of high yield bonds callable over the next year, but only $57bn of that is now trading above its call price.2  That means there is ~$330B trading below call prices and it is the job of the high yield manager to find these securities and determine which of those are attractive holdings, thus allowing for coupon income as well as potential capital appreciation.  There are many different reasons these are not trading at the call levels and the expertise is to find the ones where it a situational reason rather than a bigger fundamental reason.

1 Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).
2 Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 7/13/18, https://markets.jpmorgan.com.

High Yield Daily Update

The Bloomberg Barclays US High Yield Index was up 0.02% yesterday,* while the high yield bond market is again flat today despite oil and gold being lower again.  Fed Chair Jerome Powell is sticking to the comments from the last meeting that gradual rate hikes are still to come and that the economy is doing well.  Industrial Production beat estimates but under the hood it was driven by autos, and if you take that out manufacturing, it was a slight miss.

Oil is down again today approaching the 100 day moving average.  Normally when we see oil down during the peak driving season and gasoline prices higher, we see refiners buying cheaper oil to make and sell more expensive gas.  This is not happening as gas has weakened more than oil. Also, it looks like the Saudis, Libyans and Iranians are producing slightly more expected, thus causing weakness.

There was a slight outflow yesterday for high yield mutual and exchange traded funds and no new-issues priced, but two issuers are on the docket for today for ~$2B in proceeds.  This scenario and the fact the US economic climate looks much better than that for many non-US corporate debt issuers, the bid remains in the domestic secondary high yield bond market.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The Bloomberg Barclays US High Yield Index was up 0.07% on Friday,* while it is a muted start to the week in the high yield bond market as we have the Russia/US meeting happening and many have a sports hangover.  It was a big day for sports outside of the US, with the Wimbledon finals, the World Cup Championship, and the Le Tour de France racing across the famed cobblestones.  Equity markets are opening flat today, mirroring high yield, which is holding up relatively well despite oil down $1.75.  Oil is down on headlines that the Saudis are taking president Trump’s suggestion to pump a little more and his treats of releasing oil from the US reserves to keep oil and gasoline prices down.  Many believe this will be temporary and from what I read many expect $80 oil this year.  Retail sales for June outside of autos and fuel were not overheated but the story here were the big revisions upward from May.  Tax cuts and tax refunds seems to be putting confidence in the consumer.

Lipper reported inflows of +$1.85 billion into high yield bond mutual and exchange traded funds, while floating rate bank loan mutual and exchange traded funds had a +$212 million inflow for the week ending 7-11-18. Fund flows into bonds were flat on Friday, while loans continue to see inflows.  The technicals for high yield have been a very interesting and confusing mixed bag.  Outflows from high yield mutual funds and ETFs have been huge both in 2017 and so far in 2018, so that creates a significant headwind.  But real money investors have been playing a bigger role and they remain strong.  People often forget about how much coupon cash flow and proceeds from calls, maturities, and tenders comes in weekly that needs to be re-invested.  The supply side has been considerably below last year, which has been a significant positive offsetting the fund out flows.  So overall, high yield market technicals are neutral.  We would expect new issue supply in bondland for 2018 to be well below what we saw last year.

There have been a ton of investors throwing cash at the floating rate loan market this year.  We think one of the biggest problems this cycle will be the collateralized loan obligations (CLOs).  While we see many attractive opportunities in the off the run loan market (which we view as a less efficient market, with more “orphaned” credits that aren’t widely followed), loans overall have been very popular and are sporting far more leverage than in past cycles.  The value of having a first lien in a 5-6x levered company may not be worth that much if it is the only debt outstanding, and for those credits that are impaired, the recovery rates may be well below historical averages.  So this potentially may be a far bigger mess down the road, and may create even more opportunity once it begins to unravel.  We see much “research” discussing moving senior into loans but that is a misnomer in many cases.  Tourists in that asset class need to be aware.  Loans are simply another great opportunity set; there are lots of good ones and lots of bad ones.

There is the constant question of active versus passive management.  This is the time in the cycle where asset class runs have been spent.  We have often said that as an active manager, we don’t see our position in as managing money, but rather managing risk.  We believe this is absolutely critical going forward.  We believe that investors should avoid many of the deeply subordinated and highly levered transactions, thus actively managing risk is crucial.  The large high yield index-tracking ETFs have seen heavy inflows over the past couple weeks, but investors should look into the yields and returns many of these funds have generated so far this year—they might not like what they see.  We believe that active management is better positioned for the current environment on both the yield generation and risk side.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The Bloomberg Barclays US high yield bond index was up 0.15% yesterday,* but the high yield bond market is opening weaker today for a variety of reasons, with the main one TARIFFS!  The US is prepping for another $200B in tariffs on imports from China, slated to take effect September 1.  That gives both sides the remainder of summer to negotiate.  President Trump is also at the NATO summit calling out those countries, Germany in particular, for not paying their fair share and being between a rock and a hard place with Russia as it was said Russia controls 70% of Germany’s natural gas flow. This is strategic since there are also negotiations going on with the EU, namely Germany, on trade and tariffs.

There is little movement in the 10-year Treasury following a stronger than expected PPI number this morning.  Costs for truck transportation of freight was the highest since 2009; fuel and wages are driving this as there is a big demand for drivers.  Interesting enough for the consumer is food prices fell 1.1%—will this be seen in tomorrow’s CPI report?

Moody’s reported that the US speculative grade default rate fell to 3.4% in June from 4.0% in March.  Moody’s analysts expect the Media: Advertising, Printing & Publishing sector to see the highest number of defaults in the US.  They also stated that despite the tariff banter, overall global growth and liquidity are sufficient to keep corporate credit quality steady.

Four high yield bond new-issues came to the market yesterday, all drive by deals that priced at the tight end which indicates that the market is hungry for new paper.  This makes sense as we have seen three straight days of inflows.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The Bloomberg Barclays US High Yield Index was up 0.22% yesterday,* and the high yield bond market is better again today, while equities are giving up their big run from earlier this morning.

In the latest quarter, distressed debt funds took in a good amount of cash in the private fund space.  Given that many of the larger index-tracking products are giving investors what some see as a mediocre dividend, it looks like investors are searching for higher returns in distressed debt.  What will be the catalyst?  You know our opinions on the ratings agencies as per their effectiveness in assigning credit ratings—we believe they often get it wrong—but their data on corporate health and defaults is useful and  is not showing distressed debt will be plentiful in the near future, and for what is out there, investors need to be selective as to what specific credits they invest in.

The 10-year US Treasury yield sits here at 2.87%, down from the multiyear high of 3.11% on May 11th after many said we were going to 4%.  Many factors go into where rates are going and if you just follow the propaganda machines out there you will often be wrong—often deep pockets get on TV to sell their products.  We believe that active research is required and if you go back and read our writing from the beginning of 2017 www.peritusasset.com you will see why we did not see a big move up in rates and still don’t.

There are only three high yield bond new-issues on the forward calendar for this week and thus the inflows into the asset class are pushing the large, on-the-run names higher and pushing several of the index tracking ETFs to premiums over NAV.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The Bloomberg Barclays US High Yield Index was up 0.10% on Friday,* but high yield bonds finished last week with spreads widening to Treasuries.  Some of this was because the 10-Year Treasury yield drifted lower, while bond prices were weaker as well on the week.  Leading the weakness in high yield bond market last week was the larger on-the-run, index inclusive bonds.  Given there was an outflow from high yield bond mutual and exchange traded funds of -$1.73 billion for the week ending July 5th, this would be expected.  No new-issue high yield bonds came to market last week and last month’s new-issuance was the lightest June since 2013.  We should see a pick-up in issuance the next three weeks of July.

The June employment report came in strong and wage inflation does not appear to running above expectations.  With the rising labor force participation helping lift the unemployment rate 0.2% to 4.0% this too should give the Fed confidence the economy is still growing on target without the wage inflation they fear will require them to act quicker.  Keep an eye out for the PPI and CPI number for June due out this week.

* Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).

High Yield Daily Update

The Bloomberg Barclays US High Yield Index was up 0.05% on Friday,* but high yield bonds are opening weaker to start this new quarter with the larger on the run names bearing most of the downside.

There should be lots of fireworks this week literally and figuratively as tariffs go into effecting at different times through the week and Independence Day is on hump day, where we’ll get bar-b-ques and booms in the sky.  The Asian markets were lower today going into these continued trade tensions and it appears to be risk off everywhere else, as equities are down and there is a small bid in longer Treasuries as those yields continue to drift lower.  The US dollar continues to strengthen while Merkel’s/Germany’s issues continue to weaken the Eurozone markets and euro currency.

Last week was one of the busiest since March for high yield bond new-issues with over $7B pricing all the while the equity markets were down and the VIX was up significantly.  Volume in new-issues are still trailing last year by ~23%.  With the high yield index spreads widening out over the last week, we believe this could create an opportunity to add some good quality paper at a discount for active managers.

Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).