High Yield Daily Update

It is risk on again today as high yield bonds are better along with equities soaring, as the DOW blows past 23,000.  Sellers of longer maturity Treasuries are driving the yields higher as the 10-year sits at 2.33%.  It looks more and more like the Fed will raise rates again in December as the Bloomberg’s World Interest Rate Probability calculator sits at 84%, up from 69% just two weeks ago.

The high yield new-issue market only produced one small deal yesterday but three more were added to the calendar bringing it to nine.  With the Fed expected to raise rates in December, where will new-issuers price their coupons as the yield curve flattens?

Given the demand for yield continues and certain parts of the high yield bond and loan markets are tight from a historical perspective, where does one still get decent tangible yield for their clients that want to live off of cash flows rather than other means?  See our piece, “Finding Value” to read about the value we see that is still available in today’s high yield market.

High Yield Daily Update

As we start a new week, the 2-year US Treasury yield has hit 1.54% and if it closes above this level that will be the highest close since September of 2008.  On the long side, the 10-year Treasury yield has slipped back to 2.30% and many are expecting a future inverted yield curve.  Against this backdrop, we have seen some attractive discounts in the floating rate loan market and are taking advantage of these.  Within the high yield bond market, only one new-issue priced yesterday but there are eight on the forward calendar as issuance took a breather as the earnings season kicked off this week, forcing issuers to wait for the blackout period to end.

Oil is moving slightly higher again as the Iraq versus Kurdistan tensions are escalating, spooking the market a bit as they feel the Kirkuk field could be in jeopardy.  Import/export prices came in better than expected and US manufacturing is shrugging off the hurricanes and churning higher again.  Lastly, what does it say about the future of retail bricks and mortar when Nordstrom pulled the plug on going private, as there was not enough interest from private equity and banks willing to back this.

High Yield Daily Update

Pray for those injured or killed in last night’s shooting, including two of my friends who were injured but will be ok.

Today, high yield bonds are opening lower following the lead of oil and gold.  Treasury yields are flat, while equities are up slightly.  While the demand for yield remains, as more inflows came into the asset class last week, the supply of corporate bonds is seen as light going into October as compared to last October.  There are nine new issues on the forward calendar after two priced on Friday for $2B in proceeds. Fourteen deals for $7.1B priced last week.

The VIX dropped another 6% last week and is down in 8 of last 10 sessions, while oil plowed through $52.  This can reverse quickly, as seen by oil today down $1.50.  Complacency is not what you need here.  In order to fill out your fixed income portfolio wisely, we believe that you need to be with an active manager that can work to provide alpha while working to manage the risks of the markets for you.  Given the index tracking products having a large share of their portfolios in BB rated securities and that segment of the market is at multi-year low spreads, we believe that these products don’t represent the value the high yield market has to offer and see risk if/when there will be a reversion to the mean.

High Yield Daily Update

High yield bonds were firmer yesterday as demand continues to outpace supply by approximately three times.  Four new-issues priced yesterday for $1.5B in proceeds, with another half dozen on the forward calendar.

Long maturity Treasury yields continue their steady climb with the 10-year pushing through its 200-DMA and the 2-year touched its highest level since November of 2008.  With this action happening in Treasuries, we are seeing some inflows into floating rate loans.

Consumer Comfort numbers increased for the first time in four weeks, while Q2 GDP was finalized at a 3.1% clip.  Expectations are for a dip in Q3 GDP on the back of the hurricanes and uncertainty in Washington, DC.

The risk spread over US Treasuries for BB rated US corporate bonds tightened to 211bp on Wednesday, the lowest level since the 2008 Financial Crisis, according to Bank of America Merrill Lynch data.  We believe this is why you can’t sit in a static beta index product.  Yes it’s lower cost, but we believe this is an environment in which you will get what you pay for.  We believe proven, active managers, such as Peritus, can benefit during this environment.

High Yield Daily Update

High yield bonds are a bit weaker today as Treasury yields are moving higher on the back of stronger Durable and Capital Goods orders.  Only one new issue came to market yesterday, but over a half dozen for over $6B in proceeds are on the forward calendar.  This has been the busiest September since 2014.

Oil is back above $52 on reports that crude stockpiles have shrunk, putting a base under energy credits.  Natural gas prices have been weaker over the last week, and we have seen a large decline in natural gas prices in Western Canada with certain regions showing the worst monthly pricing in 15 years.

As per the health of the high yield asset class and if you trust and believe in the ratings agencies (though we don’t give them much credence), another indicator such as upgrade-downgrade ratio showed strength with upgrades exceeding downgrades MTD.

All eyes now are on the Trump tax plan.

High Yield Daily Update

High yield was a bit better yesterday as oil rose and Treasury yields faded.  The yield curve is the flattest since 2007 and front end yields are the highest since 2008. Is this the credit markets telling you there is no real inflation on the horizon despite the Fed wanting to raise rates?  I think it’s both the hunt for yield in a safe place fueled by the demographic movement plus there is no real demand as we witnessed by recent company earnings.

Turkey threatened to shut down Kurdish oil exports in response to the region’s independence vote, which pushed oil prices higher yesterday.  Oil is a touch lower today as Moody’s notes that the outlook for the global oilfield services and drilling sector was stable and that the “worst” was over, with the sector now in the early stages of a cyclical recovery.

Moody’s Liquidity Stress Index was nearing record lows as it dipped to 3.2% in mid-September from 3.4% in August, indicating corporate liquidity has strengthened. Outside of any geopolitical problems, I don’t see a big catalyst for downside other than there will be some that take money off the table from time to time.  If and when this happens, we would view it as an opportunity to dollar cost average as we don’t believe the demand for yield is going away.

BB credits are hitting multiyear yield lows, which we believe is another reason why investors should look to active management to find value.  As an active manager, we focus the credits that we believe provide investors an attractive risk/reward and our goal is to provide both tangible yield distribution and total return above the index.

High Yield Morning Update

High yield bonds are opening better today after a quiet, flat day on Friday.  Two new-issues priced on Friday and September is now looking to challenge the biggest issuance month of the year, March’s $48B in new issue proceeds.  Of note, 43% of last week’s new issues were dividend deals going to private equity sponsors.  Additionally, with oil up in nine of the last ten sessions those credits are attracting buyers.

With the yield to worst on many of the high yield indexes around 5.5%1, and last month distributions for some of the larger passive products under this level, we believe investors should be thinking of active management.  We believe investors need to understand what they own, including looking at holdings that are trading at big premiums to call or maturity prices that could suffer pricing hits if and when there is profit taking in the sector, as many of the securities within the indexes are at very low yields.

1 Yield to Worst (YTW) is the lowest, or worst, yield of the yield to various call dates or maturity date.   For instance, the YTW on the Bloomberg Barclays High Yield Index is 5.5% as of 9/22/17.

High Yield Daily Update

The high yield bond market was better yesterday but all eyes are on the Fed press conference today.  Recent inflows into high yield mutual and exchange traded funds have added cash bids to both the new-issue and secondary markets.  Three smaller-sized new issues priced yesterday for only $625M in proceeds, while another half dozen are on the forward calendar.

Oil is over $50 per barrel today while the Treasury long-end has a small rally, with yields down a tad.  What to see some yields on various 10-year government bonds around the globe?

US  2.23%

Germany   0.4%

Japan   0.0%

Switzerland   -0.1%

As per high yield bond market yield levels, take a look at the two JP Morgan’s High Yield Indices:1

JP Morgan European Currency HY – 3.28% yield-to-worst

JP Morgan US HY – 5.92% yield-to-worst

We believe the moral of the story is that you need to be an active investor to unlock value above average index and risk free returns.  The world is not growing much as witness by those government bond yields and with demographics playing against it, commingled with Washington, DC gridlock we believe we will remain in this subdued state.

1  Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leverage Loan Morning Intelligence,” J.P. Morgan North American Credit Research, 9/20/17, https://markets.jpmorgan.com.

High Yield Daily Update

High yield bonds are following yesterday’s lead by having another positive day. While Treasury yields are creeping back up from their YTD lows, the hunt for yield is not and will not go away.  Oil is a touch lower but is near a seven week high and is up in eight of ten sessions, while gold is a touch higher as stocks continue their grind higher.  Energy names are leading the high yield market higher, with a few names showing up on the stock IPO forward calendar.  Two new issues priced yesterday and there are still eight more deals on the forward calendar.  Additionally, Toys R Us filed Chapter 11 yesterday as the retailers keep struggling.

As we close out the third quarter there is a lot of chatter about the bank corporate earnings and how will fixed income trading rules impact them.  The government tied their hands with the Volcker Rule inside of the Dodd Frank regulations.  There is still trading taking place, but the margins for these guys have eroded.  Outside of supporting their own deals with their capital in the new issue market, we see little in the way of activity other than taking orders, and there are minimal margins there.

We believe that there is still attractive yield out there but investors need to understand where to find it.  So many have gone to the lower cost, index-based products, but we believe they have also given up notable yield and potential total return opportunities by doing so.  We have recently written about the high yield indexes, to help people understand what is in an index and index based product in the high yield market, in our piece, “Understanding an Index.”

High Yield Daily Update

Now that Labor Day is over and the hurricanes have passed, we have “risk-on” for the financial markets as the stock markets have been in positive territory in seven of the last ten trading sessions.  Investors are selling Treasuries as we have seen the 10-year Treasuries go from a 2.05% yield to 2.17% today in a matter of days.  Stocks are up again today, as are high yield bonds.

The high yield new issue calendar is bulging with 14 deals on the calendar after pricing three yesterday for approximately $2B in proceeds.  Demand for not only new-issues but secondary high yield paper is there, as inflows into high yield bond mutual and exchange traded funds picked up last week and the need for yield is not going away.

We feel corporate America is in pretty good shape, as witnessed by the August close of the Moody’s Liquidity-Stress Index coming in at 3.4% versus an all-time low of 2.8% and Moody’s also expects the speculative grade default rate falling to 2.7% as we end the year, down from the July rate of 3.1%.