High Yield Morning Update

The high yield bond and loan markets got slapped around a bit yesterday as many high yield index-tracking ETF’s traded down through their 100 day moving averages.  Today is softer still, but with oil up $0.50 the pressure is easing off this sector.  It is estimated almost $1B came out of high yield bond ETF’s yesterday which would make it the third largest one day high yield ETF outflow on record.  JP Morgan reported that energy-related bonds accounted for 35% and 32% of trading volume on Wednesday and Tuesday.Oil remains a concern even though the announced storage numbers were more of a draw down than expected.

Moody’s Liquidity Stress Index slid to 3.7% as of mid-June, down from 4.2% in May, making it the lowest since November 2014, which reflects an open refinancing market for high yield issuers, generally healthy corporate balance sheets and much less commodity strain as many have restructured in one way or another.  No high yield new issues priced yesterday but there are a half dozen in the pipeline.  The 10-year Treasury yield continues its fall as it touched 2.14% again.

1 Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 6/22/17, https://markets.jpmorgan.com/?#research.na.high_yield

High Yield Morning Update

High yield debt is softer again today as witnessed by some of the larger high yield bond index-based ETF’s now trading at a discount to NAV.  Oil is down over $1 and some are now expecting it might even reach the multi-year lows we saw in 2016.  Treasuries are flat on the back of better than expected existing home sales.  We did see mortgage rates drop last month, so could that have been an added help?

Paul Ryan said in his speech yesterday that we will not get GDP growth back to 3% unless we get tax reform.  As we said in our 2017 outlook letter (see “Pricing Risk and Playing Defense”), it doesn’t appear much will get passed in the near future as the gridlock seems like it will continue until maybe after the 2018 elections, as both sides struggle to get the necessary vote count.  Combine this with the aging demographic cloud in much of the world and we might not see 3% again in the years and maybe even decades to come.

High Yield Morning Update

High yield corporate bonds are better today following Friday’s down day.  Last week, Lipper reported another inflow into high yield mutual and exchange traded funds of $198mm for the week ending June 14th.  New cash and a light new-issue market are keeping a bid in the secondary market.  Moody’s reported a 3.3% default rate for the month of May and is estimating this to continue to fall in the coming months.  Given this outlook, investors seemingly feel it is a safe place to clip interest income as corporate America is not overspending.

Oil continues to trade under $45 as more oil rigs (+6) came back online for the 22nd consecutive week.  Iraq’s oil minister wants to raise their output and Libya is now producing 900K barrels a day vs. 320K last year. This added production may further soften prices in the near future even though demand is still increasing and we may see individual companies’ financials take a hit when the +$50 hedges begin to roll off. We recently saw some prominent hedge funds had trimmed their holdings in the top ten shale companies by several hundred million.

Housing starts came in at a -5.5%, when estimates were +4%, and the forward looking Building Permits came in at -4.9% which is a barometer of future building.  Is it demographics settling into the housing numbers or is it something else?  We have written for several years that the aging population in many countries, including the US, is a major factor in limiting growth in many industries as we move forward.  Equity markets continue to set new highs, yet the 10-year Treasury yield has fallen below 2.15%, which seem to be sending mixed signals on the outlook for growth and economic strength.

Although information and analysis contained herein has been obtained from sources Peritus I Asset Management, LLC believes to be reliable, its accuracy and completeness cannot be guaranteed. This report is for informational purposes only. Any recommendation made in this report may not be suitable for all investors. As with all investments, investing in high yield corporate bonds and loans and other fixed income, equity, and fund securities involves various risks and uncertainties, as well as the potential for loss. High yield bonds are lower rated bonds and involve a greater degree of risk versus investment grade bonds in return for the higher yield potential. As such, securities rated below investment grade generally entail greater credit, market, issuer, and liquidity risk than investment grade securities. Interest rate risk may also occur when interest rates rise. Past performance is not an indication or guarantee of future results. The index returns and other statistics are provided for purposes of comparison and information, however an investment cannot be made in an index.

High Yield Morning Update

High yield corporate bonds were slightly weaker yesterday but rebounding a bit today.  Two new-issues for $950M in proceeds priced yesterday and we are not expecting anything further until after the Fed meeting.  The Street is saying it is a 98% certainty that the Fed raises by 25bps tomorrow.  OWIC’s (offers wanted in competition) are outpacing BWIC (bids wanted in competition) today in high yield by over $100M, which backs the stronger high yield market. Moody’s has recently reported that default rates continue to decline and are expected to decline further toward 2.5% by year-end.  The Street is mostly quiet today as Jeff Sessions’ testimony is expected to be a close second in viewership to that of Comey last week.

Oil is giving up yesterday’s slight gains.  It is reported that Brent Crude is in “death cross” territory today, with the 50 day moving average falling below the 200 day moving average for the first time since May 2016.  West Texas Intermediate (WTI) entered death cross territory earlier this month. The EIA reported a surprise build in crude oil storage, with the first build in nine weeks, which is not good for positive pricing.

High Yield Morning Update

High yield corporate bonds were weaker yesterday as outflows hit the market and we are opening weaker today too. Bid wanted lists increased dramatically over offer wanted list to the tune of $918M vs. $297M, respectively, in another sign of market weakness.  The yield curve has flattened and the 10-Year Treasury yield is hovering around its 6-month and YTD low.  With the ECB cutting its inflation forecast through 2019, investors are waking up to the fact that some rabbits need to be pulled out of the hat by the US to spur world economic growth, but with gridlock in our nation’s capital this doesn’t appear to be happening any time soon.  We expect to see more of this today as Comey takes center stage.  With oil trading down again at $45.5 and the high yield indexes still holding a big energy weighting (for instance, 15% energy concentration in the JP Morgan US High Yield Index), could we see weakness again in the broader high yield market tied to energy?  We have started to see a decoupling of energy volatility with high yield returns over the past couple months; for more data on this see our recent market commentary, The Decoupling of High Yield and Energy.

High Yield Morning Update

High yield bonds are weaker again today as bid wanted lists are smaller than offer wanted lists.  The new-issue market only printed two deals for $870mm in proceeds on Tuesday, but $5bn of paper printed on Monday.  Two small deals are expected to come today.  The new-issue market is up 18% so far versus 2016, pricing 235 deals for $128B in supply, indicating to us that liquidity is generally  available for issuers.  It is expected the Fed will raise the Fed Funds rate at their upcoming meeting, but the longer dated Treasury bonds don’t seem to care, as the 10-yr Treasury is now at a 2.15% yield and appears to be heading to 2%, certainly contrary to all those saying the 10-yr would be hitting 3%.  Oil is down again, posting a decline in 6 of the last 10 sessions.  The debate continues between US Shale production vs. OPEC production limits.  Gold is retreating after hitting $1300.  An interesting statistic from JP Morgan this morning, “When examining yield buckets the most interesting observation is that, after decomposing the loan and bond universes, a much higher % of the bond universe carries a yield of 4% or less. For example 30% ($372bn) of US HY bonds trade below 4%, which is comparable to only 16% ($149bn) of Leveraged Loans.”  These sort of statistics are reflective also of what we are seeing within the various high yield indexes, and given this, we believe active management in the high yield bond market is important as investors seek yield and value.

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 6/7/17, https://markets.jpmorgan.com/?#research.na.high_yield.

High Yield Morning Update

High yield bonds opened the holiday shortened week slightly better and today is no different.  Inflows into the asset class are keeping a bid in the secondary market as the new-issue market is light.  Despite oil’s slide here into the $48-range, the bonds of these companies are largely not weakening in sympathy.  We have seen a large rebound in the energy sector and the high yield market overall over the last fifteen months, helped by inflows into the asset class and the search for yield, now with many of the highly levered companies within the market and indexes trading tight, often in line with lower levered credits (thus why we believe active management is important in today’s market as you look for yield).  The 10-year Treasury yield continues to fall despite decent economic releases.  India and China too had stable economic reports thus easing concerns that those economies will be a drag on the US.  With little getting done on the Trump agenda and only about six weeks of work left before Congress takes their August recess, it appears the Fed hikes may not be as robust and often as was predicted several months ago.  The yield-to-worst (YTW) on the JP Morgan US High Yield Index dipped back below 6%, just a few basis points off the multi-year low of 5.95%1, which is not surprising since the yield on the 10-year has also come down some forty basis points from this year’s high and the below average default outlook. 

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 5/31/17, https://markets.jpmorgan.com/?#research.na.high_yield.

High Yield Morning Update

High yield bonds finished slightly higher yesterday and are opening slightly higher today.  Much of the focus was on the new-issue market as three deals came for $1.1B in proceeds, bringing this week’s totals to nine deals for $4.65B in proceeds.  A few more deals are expected today for a total close to $5B in proceeds.  OPEC agreed to keep their curbs in place through March of 2018 but oil is still off a bit.  The battle will wage on between OPEC production cuts and the US Shale production increases.  The question we see is, can the US Shale producers raise enough money to keep bringing on more wells/production after the “easy” wells are brought back on?  But, nothing has changed here, as decline rates in the Shale basins are still very steep and costly.  Treasury yields are slightly higher this morning.  At 2.26%, the 10-yr Treasury is well below the YTD high of 2.62%, even in the face of a probable Fed hike next month.  Could it because the expected US GDP growth rate most likely won’t be fueled by tax and business reform as the dysfunction in Washington is at epic levels?  With a small inflow into retail mutual and exchange traded funds yesterday, it looks like the index ETF’s are buyers this am.  The yield-to-worst on the JP Morgan US High-Yield Index stands at 6.01% versus the yield-to-worst for the JP Morgan European Currency High Yield Index at 3.54%, with spreads also substantially higher for the US market versus the European market.1

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 5/25/17, https://markets.jpmorgan.com/?#research.na.high_yield.

High Yield Morning Update

The high yield markets are a mixed bag today as the struggle continues between the need for yield by retail and institutional investors versus a market that is at a lower yield relative to historical levels.  Demographics and low Treasury yields account for this but the default rate for this asset class is also very low.  JP Morgan says the implied versus actual default rate is 1.74% and 1.84%, respectively1, so the expected loss through defaults according to these numbers is low.  Equities, Treasury yields, oil and gold are all flat today as I think everyone is waiting on the Fed Minutes due out in a couple of hours and is trying to digest the weaker housing numbers, the terrorist attack developments and where the government budget and tax cuts will ultimately fall out.  The new-issue market is the busiest in ten weeks with six deals for $3.55B in proceeds already in the books for the first two days this week.  Despite a favorable new-issue market, Lipper is estimating net outflows YTD from high yield mutual and exchange traded funds to be $8.6B.  It appears that SMA’s for pension and insurance companies are keeping the bid in the market as both have to match liabilities to pay their bills.  On the energy side, even though oil is up nine of ten sessions the wager continues between OPEC keeping their curbs on versus shale producers adding rigs and output.

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 5/24/17, https://markets.jpmorgan.com/?#research.na.high_yield.

High Yield Morning Update

The high yield secondary bond market is opening up higher today, as the new-issue calendar continues to be light, forcing buyers into the secondary market.  Only eight deals for $3.685B in proceeds priced last week, the slowest week this month.  Given Memorial Day is a week away, we expect that this week will be much the same. Month-to-date issuance is only $14B versus a $34B average over the past four years in May.  Oil is higher on OPEC talk of extending the output curbs through 2018, but the shale drillers keep increasing output as they bring on more and more wells.  Default estimates in this industry are predicted to remain low.  Lipper reported an inflow of $649M in the week ended May 17th into high yield bond mutual and exchange traded funds after two weeks of outflows totaling $2.1B.  With the light new-issue calendar this pushes buyers into the secondary market as the new-issues that do come are often well oversubscribed and everyone is getting smaller allocations.