High Yield Daily Update

The high yield bond market is better today after weakness yesterday in the larger flow names that we see embedded in the index tracking funds, though the broader high yield bond market was up slightly with the Bloomberg Barclays US Corporate High Yield Index up 0.04% on the day.No high yield bond new-issues priced yesterday but there are eight deals for ~$3B in proceeds on the forward calendar.  May, usually one of the busiest for supply, is tracking at the slowest May since 2012.

There have been some small net inflows into the asset class over the past few days but on the year there are over $15B in net outflows from high yield bond mutual and exchange traded funds.  Given the broader high yield bond market is $1.7T in size2 and US high yield market is over $1.3T, with mutual and exchange traded funds only about quarter of that3 these outflows don’t make a dent in the broader high yield bond market.

Money continues to flow into floating rate loan funds as retail investors try to hedge against possibly higher rates.  We recently wrote a piece on the loan market and why we believe investors should have a blend of bonds and loans in their portfolio, click here to read our piece “Floating Rate Loans: Rising Rates, Repricings, and the Real Income.”

We have spoken a lot about demographics and their impact on spending and rates—did you see the latest report that the US population is having the fewest babies in decades and China is considering eliminating their baby policy as they see its negative effects taking place of future GDP growth?  You see, if you are not replacing the workers entering retirement you are not adding much needed contributions into Social Security and Medicare and that will further exasperate the underfunding.

1 Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).
2  Acciavatti, Peter D., Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li, “Credit Strategy Weekly Update,” J.P. Morgan, North American High Yield and Leveraged Loan Research, May 18, 2018, p. 41, https://markets.jpmorgan.com.
3 Acciavatti, Peter D., Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li, “2017 High-Yield Annual Review,” J.P. Morgan, North American High Yield and Leveraged Loan Research, December 30, 2016, p. 113, https://markets.jpmorgan.com.

High Yield Daily Update

The Bloomberg Barclays US Corporate High Yield Index was down -0.06% on Friday.  However, the risk on mentality is not only present in the equity markets today but is also on in high yield bond market.  With a truce in the US-China tariff war, the markets are upbeat.  With oil hitting $72 again and many now calling for an average price for 2018 of $75 – $80 this is keeping a nice bid in these energy-related credits.

Two high yield bond new-issue priced on Friday for $1.4B in proceeds, a BB name came at 5.375% and a B name came at 7.75%.  If these issues meet the index inclusion criteria, a passive, index-tracking ETF investor will own both, whereby an active manager can pick whether they like either one.  From an alpha generating standpoint I can’t see many flocking to a BB name at a yield 2.3% above the 10-year Treasury here at 3.06%. We believe that you must remain picky on what you own as a third of last week’s new-issues were either CCC rated or LBOs (leverage buy outs) or both.  In many cases, we see LBO paper that is highly leveraged thus can be at a higher risk for default down the road.  While this is not to say these types of names are not there for a shorter term trade, but it is a consideration as a long term holding.  As we look into the next week, there are more than a half dozen deals on the high yield bond new issue forward calendar.

* 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

Yesterday the Bloomberg Barclays US High Yield Corporate index was down -0.02%.*  Large, on-the-run, flow names are weaker today while the rest on the market is generally flat to higher.  Backing this up are outflows from large index-tracking ETF’s in the latter half of the reporting week ending on Wednesday, with Lipper reporting outflows of -$542M for the week ending 5-16-2018.  Additionally, the biggest passive high yield ETFs focus on the larger tranche size credits, and often we see the larger tranches of bonds carrying smaller coupons, exposing them to more interest rate sensitivity.  Given the 10-year Treasury yield hit 3.11% at yesterday’s close, putting it at a 7 year high, the prices of these securities may likely adjust downward.

Five new-issues priced yesterday for ~$1.8B in proceeds, leaving a half dozen names on the forward calendar.  Next week should be fairly busy on the primarily market side, as the earning black-out periods are mostly over and there is not much on the economic calendar until the second half of the week.

The summer will be interesting as gasoline prices are near a three year high.  How much will this higher cost take out of non-energy related consumer spending? For instance, will retail continue on its weaker trend?  The increase in oil and gas prices are concerning to some, as India is calling of the Saudis to produce more oil.  The US is pumping at a record pace but unfortunately the infrastructure to get it from the wells to the distribution/processing plants is way behind.

* 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 Corporate index was down -0.03% yesterday and the high yield secondary bond market is flat today, but there is a bid under ETF’s.  The market is doing very well despite continued outflows, rising long maturity Treasury yields and a stronger dollar.  Brent Crude hit $80 for the first time since 2014 and WTI is holding in here at $72.  EIA Crude storage was down for the second week in a row and so was gasoline, which is not good heading into driving season that kicks off with Memorial weekend.

No high yield bond new-issues priced yesterday leaving eight on the forward calendar.  With a lack of supply of new-issues, combined with low default rates and good corporate earnings, we expect that the high yield secondary market will continue to do well.  The second half of the year will bring some large new-issues in the M&A space so we will see how the market likes them. High yield floating rate loans are flat again today as the market is looking at allocations that includes more than 50 deals before month end.

Keep an eye out for GDP growth, or lack of around the world.  Is the US an outlier?  After eight straight quarters of growth, Japan’s GDP contracted in the first quarter, by an annualized rate of 0.6% quarter over quarter.  Many developed countries still have an easing monetary policy unlike the US’s tightening.

We believe that for all of these uncertainties, you need an active manager like the Peritus team that has been managing through cycles for a few decades.

* 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

High yield bonds are a touch weaker today on the back of the longer-dated Treasury yields rising.  Yesterday, the Bloomberg Barclays US High Yield Index was down 0.16%.*  Oil was down earlier this morning on a stronger US dollar, but has now reversed and is flat on the day as the IEA reported a bigger drawdown than estimated.

A healthy sign for the high yield market is that new-issues are picking up despite outflows from the high yield index-tracking ETF’s yesterday, as two more deals for $1.15B in proceeds priced yesterday and six more are on the forward calendar for this week.

Housing starts and permits were below estimates, could this be a reaction to higher interest rates?

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

High Yield Morning Update

After a 0.07% positive move the in the Bloomberg Barclays US Corporate High Yield Index yesterday*, the high yield bond market is a bit softer today, fueled by the 10-year Treasury yield moving past the key 3.03% level, putting it now at a level not seen since 2011 and 2013.  Will it last?  There are consequences to higher rates.  Many point out that rates are still low as compared to past economic cycles, but in past cycles the US didn’t have $20T in debt to service.  Also, savers will earn a few more bucks in CD’s and the like, but what will this do to the housing market as mortgage rates rise?

Today’s Empire State manufacturing index report and retail sales report got the Treasury yields moving higher and the equity markets moving lower.  April sales were healthy, while March sales were upwardly revised to reveal even greater strength and this is creating inflation fears.  Also, oil is at a multi-year high and this is striking fear that this too will cause more inflation.  The catch 22 is that costs might go up but if wages in this tight labor market don’t follow that could ultimately hurt spending.

Despite this rise in the Treasury yields, we believe that the high yield bond market is still an attractive place to be for fixed income, with its low duration and high coupons and a solid corporate environment. As evidence of the corporate strength, Moody’s projects that the U.S. speculative grade default rate will decline to 1.5% by April 2019 from current 3.7% level.

Only one high yield new-issue priced yesterday with seven on the forward calendar; we shall see how coupons and issuance price works out now that Treasury yields are higher.  As an active manager, we have the flexibility to sell lower coupon paper that we believe is at full value and replace with higher coupon new-issues or newly issued bonds that reflect this higher rate environment.  Click here to check out our recent writing “Strategies for Investing in a Rising Rate Environment” as we look in more detail about the high bond yield market in the face of rising rates.

* 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

High yield bonds are up this morning on the back of the released North Korean hostages.  The Bloomberg Barclays US Corporate High Yield index was up 0.02% yesterday.1  Helping overcome continued outflows from the asset class are higher equities, falling Treasury yields and oil that has spiked on Venezuela and Iran concerns.  Two high yield bond new-issues priced yesterday for $2.7B in proceeds.  Both deals were BB with a 5 3/8% and 5 3/4% coupon, translating to a current spread of 2.4% and 2.78% over the 10-year Treasury yield—no thanks.  These sorts of coupons, and even lower, are representative of types of coupons often found for a number of credits within some of the passive high yield bond index ETFs.  However, 65% of high yield new-issuance so far in 2018 is 144A-for-life securities2, which means that retail investors need to access these securities through ETFs and mutual funds versus holding individual bonds.

There is lots of economic news out of the BOE and US, but nothing we see as signaling any change in monetary policy.  The US CPI came in light which could mean the US consumer could have a few extra pennies to spend.  The number of people applying for US unemployment benefits came out this morning, keeping initial jobless claims near their 49 year low.

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, 5/10/18, https://markets.jpmorgan.com.

High Yield Daily Update

High yield bonds are opening flat after finishing in the red yesterday, the downward pressure being from the 10-year US Treasury yield pushing to 3% again.  The Bloomberg Barclays US Corporate High Yield index was down -0.01% yesterday.*  The light new-issue market and outflows are also creating some of this weakness.  We are seeing the final demand for the PPI come in a tad under estimates and a lack of wage increase push back against those calling for a 4% 10-year US Treasury yield and much higher inflation.

On the flip side oil is up, nearing $71 on the back of the US pulling out of the Iran deal.  Many experts are predicting oil to go to $80 – $90 per barrel.  OPEC shows Iran oil production at 3.8M bpd while the Iran Oil Ministry reports they produce 2.6M bpd as of April 1st.

* 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

After the Bloomberg Barclays US Corporate High Yield Index returned 0.13% yesterday*, the high yield bond market is weaker today being driven by oil, which is down $2.50 as we speak to $68.25.  Many oil exploration and production credits are weaker, as are the pipelines and servicers. Was there a leak of President Trump’s stance on Iran?  One high yield bond new-issue came to market yesterday; the calendar continues to be light as many companies are issuing loans in place of bonds.

Jamie Dimon was in the news recently claiming the 10-year Treasury yield was heading to 4% if the Fed keeps raising the Fed Funds rate and reducing stimulus.  This is hard to see as so many different factors weigh on this take.  The huge overhang of demographics is a negative as record numbers of baby boomers are moving into retirement, and US treasuries are yielding much more than Germany sovereign debt and the sovereign debt of most other developed countries, so we believe demand for US Treasuries will remain.  Additionally, if you look at what 4% would do to our government debt servicing costs, as well as mortgage rates and how that would kill the housing market, we would expect that to be a consideration for the Fed as they take action.

Regardless of what happens, the high yield bond market has historically done well in rising rate environments, and coming off this incredibly low yield period, we believe that active management in the high yield bond and loan markets are key.  Read more about how the high yield market has historically performed in rising rate periods in our recent piece, “Strategies for Investing in a Rising Rate Environment.”

* 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 bond market has opened a bit better today riding steady Treasury yields, higher equities and higher oil.  The Bloomberg Barclays US Corporate High Yield Index was up 0.05% on Friday.*  High yield bond mutual and exchange traded funds inflows continued on Friday but secondary trading volume continues to be below average, which smells like lower volatility.  We believe there shouldn’t be a lot of volatility if you look at the economy, corporate health and the market from a macro standpoint.  All of those things point to a healthy environment so we see buy and hold strategies playing out.

Oil here at $70, last seen in November of 2014, has kept a bid under oil related credits.  Higher oil is being fueled by the speculation that President Trump will pull out of the Iran deal and thus cutting their ability to export oil. Natural gas is weaker today following the EIA storage report last week that was bigger than estimated.

Eleven high yield bond new-issues priced last week for $4B in proceeds and there are a handful on the forward calendar, which should build as the week goes on as we exit earnings blackout season.  The breakdown of ratings from last week’s issuance was BB at, 19%, B+ at 59%, and CCC at 12% of issuance.  The year to date new-issuance volume is down ~18% from last year, as Treasury rates are higher thus less financial incentive to refinance existing debt.

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