Follow the money
Corporate credit markets continued to trend higher amid encouraging U.S. economic data and a new high for U.S. equities. High yield bonds have rallied significantly in July, returning approximately 2.66% month to date, as investors continue to rotate out of safe-haven investments in their ongoing search for yield.1 This week, high yield bond mutual funds reported inflows of nearly $4.4 billion, the second largest weekly inflow on record.2 Combined with last week’s inflow of $1.8 billion, high yield bond mutual funds have now attracted a net $9.1 billion in 2016.2 Year to date, high yield bonds are providing returns of approximately 12.2%, driven, in large part, by some of the largest underperformers of 2015.1 After generating returns of -15.0% in 2015, CCC rated bonds are now providing year-to-date returns of 22.1%.3 The same dynamic holds true for high yield energy bonds, which have generated a year-to-date return of 26.5% following 2015’s returns of -23.6%.4 For senior secured loans, prices rose in each of the prior 13 trading sessions and are now providing a month-to-date return of 0.91% and year-to-date returns of 5.18%.5

Extraordinary transformation
Energy high yield bonds and energy senior secured loans continued to decouple from oil prices, returning approximately 2.27% and 1.59%, respectively, in the week ended July 14.4,6 Investors received a fresh read on global oil supply Wednesday when the International Energy Agency released its July oil market report.7 On balance, the report was neutral versus June data, but the agency noted that global supplies rose by 600,000 barrels a day in June to 96 million barrels. However, it reiterated expectations that non-OPEC production will fall by 900,000 barrels per day in 2016 and noted that the market has shown “an extraordinary transformation from a major surplus in 1Q16 to near-balance in 2Q16.”7 After falling to a three-month low following Wednesday’s inventory figures, oil prices rose toward $49 a barrel on Friday after solid economic data out of the U.S. and China boosted the outlook for oil demand.8

Economic tailwind
Declining to a record low of 1.3% last week, the yield on the 10-year U.S. Treasury note rose to a three-week high on Friday after June’s Consumer Price Index, industrial production and retail sales figures capped off another week of relatively upbeat U.S. economic data.9 Core CPI rose 0.2% in June, lifting the year-on-year core CPI gains to 2.3% from 2.2% in May, as inflation shows some nascent signs of accelerating.10 Meanwhile, a rise in U.S. industrial production could signal a potential rebound for the manufacturing sector, and strong U.S. retail sales could provide a tailwind for the economy heading into the second half of 2016.11, 12 While U.S. Treasury yields rose across the curve, they remain well below where they stood at year-end 2015. Back then, the U.S. Federal Reserve was forecasting four interest rate hikes in 2016 and for short-term interest rates to end the year at 1.375%.13 Since then, interest rate expectations have continued to be ratcheted down, and global interest rates have moved sharply lower. This week, Germany became the first Eurozone country to sell 10-year debt with a negative yield—yet another milestone in the low global interest rate narrative.14 With the Bank of England signaling an August rate hike and the Bank of Japan now considering an acceleration of its government bond purchases, global bond yields are likely to remain under pressure, leaving investors hard-pressed in their search for income-producing assets.15, 16

Chart of the week: Ratcheting down


  • The yield on the 10-year Treasury note continued to climb off its post-Brexit low this week. Even with its approximately 17 basis point climb, however, its current yield remains far lower than where most analysts believed it would be at the midway point of 2016.17
  • In fact, interest rate movements have continued to surprise investors and analysts who have expected them to rise for years now. In five of the past six years, the actual yield on the 10-year Treasury note has been below the median analyst forecasts.18 The difference between analysts’ mid-year forecasts and the actual yield on the 10-year Treasury note is now greater than it has been in any of the past six years.16
  • Many Wall Street forecasters recently revised lower their interest rate outlooks for the remainder of 2016, citing slow economic growth and international political and economic uncertainty.19, 20

    1. Bank of America Merrill Lynch High Yield Master II Index
    2. Thomson Reuters Lipper
    3. Bank of America Merrill Lynch High Yield CCC Index
    4. Bank of America Merrill Lynch High Yield Energy Index
    5. Credit Suisse Leveraged Loan Index
    6. Credit Suisse Leveraged Loan Index (energy component)
    7. International Energy Agency,
    8. Federal Reserve Bank of St. Louis,
    9. Federal Reserve Bank of St. Louis,
    10. U.S. Department of Labor,
    11. U.S. Federal Reserve,
    12. U.S. Department of Commerce,
    13. U.S. Federal Reserve,
    14. The New York Times,
    15. The Wall Street Journal,
    16. Bloomberg,
    17. Bloomberg
    18. Bloomberg,
    19. J.P. Morgan U.S. Treasury Market Daily, July 11, 2016
    20. Bloomberg,

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