High Yield Morning Update

High yield bonds were better yesterday.  It is the heart of earnings season for high yield issuers and as an active manager, this is a time where we have a fresh look at how our holdings are doing from a fundamental basis.   This is also a time where we add new names because many traders read a headline and automatically sell before looking under the hood.  When securities are sold for the wrong reason, that can create an opportunity to add alpha for active managers.

Two high yield new issues priced yesterday with three more on the calendar for this week.  The month to date total is at $16.6B in proceeds which is closing in on the biggest August issuance since 2012. This alludes to a decently healthy market as new issues are coming to market despite outflows from the asset class.  The overall backdrop reflected in the stable economy, benign corporate earnings and declining U.S. high yield default rate we believe will hold the floor on high yield for now.

High Yield Morning Update

High yield bonds are opening weaker for a third straight day, and even though they rallied into the close yesterday, they still ended in the red.  Weaker than estimated CPI, PPI, and wages are creating some volatility.  To us this is no surprise as we have discussed how the aging demographics across the world will continue to be a major drag.  If you want to dig further into pressures on consumers, look no further than California.  This state continues to raise taxes on fuel, cars, goods/sales and income, thus leaving less to spend in the consumers’ pocket.

Three high yield bond new issues priced yesterday with a half dozen in queue.  Tesla is looking at bringing a $1.5B deal today.  Inflows into high yield bond mutual and exchange traded funds for week ending August 9th were positive, thus helping the new-issue market demand, but big outflows picked up from index tracking products yesterday.  Oil, gold and the 10-year Treasury yield are all lower this morning.  The high yield default rate ticked down again in July which affirms what we are seeing with company earnings, not much revenue growth but pretty healthy cash flows and earnings.

High Yield Morning Update

High yield bonds are weaker again today, with no specific driver for the weakness.  It seems that we are seeing some people take some chips off the table but the question is, where will they put it to get real tangible income?  Treasury yields are lower on the week, with the 10-year moving down from 2.27% last Friday to 2.22% today, as recent economic numbers are decent but not projecting historical growth.  Oil is higher, breaking the $50 barrier, as a recent report on the Permian Basis production is not nearly as strong as once thought.  There is an overabundance of natural gas and much less oil coming out of the ground, thus leading to the thought that this basin will not be the swing player in future production/pricing.  Stocks are lower too, much being fueled by risk sentiment related to the verbal threats with North Korea.

Earnings continue to flood in and we continue to see little top line growth but profitability is still doing quite well.  In many cases we are seeing the ready, shoot, aim mentality in stocks and bonds, as many read the headlines and sell immediately, creating volatility in names; however, if/when they do the work, in many cases the sell was not justified.  This can create an opportunity to establish a new position or add to an existing position, which we believe is one of the key values of active management versus passive/index-based products.

High Yield Morning Update

High yield bonds were mixed on Friday depending on what industry you looked at.  For instance, rental car companies continue to be weak as Uber and Lyft keep taking passengers from them, while oil E&P, oil services, and related companies firmed up as oil gained for the week for the first time in a while.

Two new issues priced closing out a very slow month, the slowest since February of 2016.  The new-issue market was slow this month as there was a Fed meeting and many quarterly economic releases investors seemed to be waiting on, including the strong 2.6% GDP number that was released on Friday.  The longer end of the Treasury yield curve rose early in the week putting a squeeze on new-issues but has since eased.  The 10-year Treasury yield hit 2.37% earlier this month, but has since eased to 2.28% well off the YTD high of 2.67%.

We continue to see the pull between aging demographics around the world and a US government attempting to put forth growth initiatives, including tax reform.  We believe that near and long-term growth will be hard to come by anywhere in the world as you have less spenders as witnessed in the China’s 2Q GDP number coming in 7% while the second half is estimated at 6.4%.  In looking at the EU, everyone was happy because their 2Q CPI came in at 1.2% vs 1.1% estimate.

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.