Corporate credit markets continued to trend higher this week, as another strong labor market report highlighted the relative stability of the U.S. economy against the backdrop of sluggish growth elsewhere around the world. Amid a slight uptick in new issuance volume, both high yield bond and senior secured loan prices rose on the week, consolidating the gains recorded in July. High yield bonds generated returns of approximately 0.13% in the week ended August 4, after returning approximately 2.52% in July.1 Senior secured loans generated a more modest 0.05% in the week ended August 4, after providing returns of approximately 1.41% in July.2 Last month marked the fifth consecutive positive monthly return for senior secured loans, which are now providing year-to-date gains of 5.76%.2 Despite a softer commodity price backdrop, energy high yield bonds and energy senior secured loans posted gains July of 0.72% and 0.77%, respectively as energy credit has so far held relatively steady amid ongoing oil price volatility.3,4
In a move aimed at stimulating Britain’s economy in the wake of its decision to leave the European Union, the Bank of England (BOE) cut its benchmark interest rate to a new low and said it would buy government and corporate bonds.5 The multidimensional stimulus package amounted to more than investors had expected, and its impact was felt across the global bond markets. The BOE’s Monetary Policy Committee cut its main interest rate to 0.25% from 0.5% and announced it would purchase £60 billion of U.K. government bonds over the next six months and £10 billion of corporate bonds over the next 18 months.5 In its statement, the BOE said “the outlook for growth in the short to medium term has weakened markedly” since the vote to leave the European Union and signaled that it stands ready to lower interest rates again before year end.5 The larger-than-expected package sent the British pound lower and yields on the 10-year U.K. government bond to a record low of around 0.64%.6 The effect rippled into other markets, pulling the yield on the 10-year U.S. Treasury note and other global sovereign bond yields lower.7 Perhaps the biggest surprise was the BOE’s decision to buy corporate bonds, which is expected to trigger some additional yield compression across the U.K. and U.S. corporate bond markets.8
Following last week’s lower-than-expected second quarter GDP growth, this week’s stronger-than-expected nonfarm U.S. payrolls report boosted investor confidence in the U.S. economic outlook. At 255,000, July’s jobs growth outstripped consensus expectations by a wide margin and suggests a level of ongoing economic expansion that was not picked up in last week’s disappointing headline GDP figure.9 The report was strong across the board, with upward revisions to June’s payrolls figures, a rise in wage growth and the unemployment rate holding steady at 4.9%.9 In a week that saw U.S. two-year note yields revisit July’s lows, U.S. government bond yields spiked Friday morning as the second consecutive solid payrolls report may have strengthened the case for a U.S. Federal Reserve rate hike sometime later this year.10 With recent U.S. economic data somewhat mixed, investors will gain more insight into the U.S. Fed’s economic outlook when Fed Chair Yellen next speaks on August 26 in Jackson Hole, Wyoming.11
Chart of the week: Middle market consistency
- The BOE noted in its monetary policy summary on Wednesday that its outlook for growth “has weakened markedly” since the June vote to leave the European Union and introduced a package of measures to stimulate the U.K. economy.5 The BOE’s move came one day after the Japanese government passed an approximately $73 billion stimulus package aimed at jump-starting its long-sluggish economy. 12
- Domestic companies have felt the squeeze of so-called international developments along with tepid U.S. economic growth. Year-over-year profits for America’s largest corporations have declined for each of the past four quarters.13 The trend could continue through the second half of 2016 as analysts expect revenues to experience their the sixth straight quarterly decline.14
- As the chart highlights, however, revenues at middle market companies have largely been spared from the declines. Instead, middle market companies have been a relative pocket of consistent growth through the past six quarters. Revenues at middle market companies have risen between 6.1% and 7.2% since the first quarter of 2015, while revenues at large-cap companies have trailed significantly.15
- Further, as of Q2 2016, a large plurality of management at middle market companies remains either confident or somewhat confident in their local economies as well as the national economy, those that most impact the bottom lines of middle market companies.15
1 Bank of America Merrill Lynch High Yield Master II Index.
2 Credit Suisse Leveraged Loan Index.
3 Bank of America Merrill Lynch High Yield Energy Index.
4 Credit Suisse Leveraged Loan Index (Energy Component).
5 Bank of England, http://bit.ly/2aPQJYV.
6 The Wall Street Journal, http://on.wsj.com/2anGjQK.
7 Federal Reserve Bank of St. Louis, http://bit.ly/2aAmG9p.
8 CNBC, http://cnb.cx/2aIcLtB.
9 U.S. Department of Labor, http://bit.ly/1gck641.
10 Federal Reserve Bank of St. Louis, http://bit.ly/2anGvQ0.
11 Reuters, http://reut.rs/2aYCPnR.
12 The Wall Street Journal, http://www.wsj.com/articles/japan-cabinet-approves-274-billion-stimulus-package-1470121631.
13 Federal Reserve of St. Louis, data through Q1 2016, http://bit.ly/2aTTCZe.
14 The Wall Street Journal, http://on.wsj.com/2b6idqG.
15 National Center for the Middle Market, http://bit.ly/1n1Aq8K.
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