High Yield Morning Update

The market was mixed yesterday as energy credits rallied with oil being up for the fifth straight day while tech, retail and other sectors remain weak.  Four high yield bond new-issues priced yesterday for $2.315B in proceeds and there are six more on the books as the rush to get a print before the Q2 end tomorrow.  The US 10-year Treasury yield has spiked to 2.27% versus a low of 2.12% last week, which isn’t making much sense given some of the recent economic data, such as first quarter GDP being finalized at a mere 1.4% in growth.  The global government bond sell-off continued and the dollar fell overnight for the third straight day as the 10-year German Bund was +7bp to 0.43%.  The concern is the easy money will be taken away from the fake growth engine that the US and other developed countries have been using.  As the Canadian, euro and British pound rise against the dollar we expect this will hurt their exports and slow economic growth.  Some market investors has expressed concerned at the rate of return available in the markets today.  In our world, yes, high yield bonds are not yielding 8% – 9% coupons and returning 10 – 15% like they did years ago, but comparable Treasury yields are also not at 5 – 6% as they were back then, so investors need to keep that in mind as they look at investment options in the fixed income space.

High Yield Morning Update

High yield debt is a mixed bag today as Draghi’s hawkish comments have fueled a rise in European government bond yields.  The US 10- and 30-year yield has crept up today too, while the rest of the curve is flat.  Yellen is out making comments on the value of assets, thus causing some volatility.  Three high yield new-issues priced yesterday for $1.25B bringing the weekly total to $3.5B.  Seven deals are on the books for this week with an estimated $2.9B.  Outflows continue for floating rate loan retail products (mutual and exchange traded funds) and it is expected that we will see a negative flow for bonds in the trailing week that Lipper will report tomorrow.  With oil stabilizing we are seeing a more positive market, but the talk is now turning to higher rates despite what the economic reports are telling us, or maybe these bankers just want to remain relevant, because world GDP growth doesn’t match their rhetoric.

High Yield Morning Update

US Treasury yields are lower with the 10-year now at 2.12%, fueled by more weak economic news today with durable and capital goods much weaker than expected.  We see this as another sign that negative demographics are weighing on big ticket spending.  Europe is higher and excited today, seemingly because the Italian government is spending billions shutting down two banks.  In the high yield market, there are seven new-issue deals on the books for this week, after only one deal pricing on Friday.  High yield new issue bond sales are up 10% over 2016 but the number of deals are up 50%.1  With the continued low rate environment, we believe the need for high yield will remain.  Loan prices were hit last week and continue this week as Treasury yields move lower.  Outflows from both loans and bonds took the market lower last week.  The number of loans trading above par is now at 53.9%, down from 76% back in March.2   We are in the heart of summer as the fourth of July holiday schedule has kicked in, Monday’s and Friday’s are dead while the three day work week is robust.  With a light earnings calendar through the holiday, we don’t see a lot in terms of catalysts for the markets over the next couple weeks.

1 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, June 23, 2017, p.31, https://markets.jpmorgan.com.
2  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 6/26/17, , https://markets.jpmorgan.com.

High Yield Morning Update

The high yield bond market is opening higher today after a rough week, fielded by lower oil and large outflows, mostly from index-tracking retail high yield bond and loan funds. Loan funds faced their first outflow in 32 weeks, as post-election we have seen many piling into floating rate debt believing the pundits that rates are rising, all the while the 10-year Treasury yield falls from the December 2016 and March 2017 highs of 2.6% to 2.14% today, and also down from 3% during the taper tantrum at the end of 2014.  We are starting to see more bonds and loans trade below par ($100) for the first time in a while, creating more opportunities for discount purchases and potentially some capital appreciation in the future.

We have talked about how the aging demographics weigh on growth around the world and as more proof, the Eurozone PMI numbers were terrible.  Reports abound that Chinese demand for base metals is in decline, which is a catalyst for the commodity sector’s weak performance over the first half of 2017.

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.