The corporate credit markets continued to improve this week, boosted by rising stocks and a six-week high for oil prices.1 For high yield bonds, prices rose in each of the past 12 trading sessions, resulting in a one-week return of approximately 0.48% and a month-to-date return of more than 1.5%.2 High yield bonds are currently on track to post their seventh consecutive monthly gain, which would be the longest streak since a 10-month stretch in late 2013 through early 2014.1 Another $889 million in inflows into high yield bond mutual funds this week brought the year-to-date inflow to more than $9.6 billion.3 As investors continue to put money toward the higher-yielding areas of the markets, high yield bond spreads have tightened meaningfully since the beginning of 2016. High yield bonds are now yielding approximately 6.4%, down from 8.8% at the beginning of the year and a high of 10.1% back in mid-February.1 By comparison, senior secured loans are currently yielding approximately 6.2% as inflows into the asset class have remained somewhat more modest over the past few weeks.4 Month to date, senior secured loans have generated returns of approximately 0.45%, bringing year-to-date returns to just under 6.2%.3
While the rally in corporate credit has been broad-based, energy credit remains a key driver of 2016 returns. This week saw oil prices rise briefly above $48 a barrel as a decline in crude inventories and hopes of a deal to cap production sent prices higher.5 This week, Saudi Arabia’s Energy Minister said informal talks among OPEC members will be held in late September. Meanwhile, the U.S. Energy Information Administration said, for the week ending August 12, 2016, gasoline and crude oil stockpiles fell by 2.7 million and 2.5 million barrels, respectively, from the previous week.6 While neither is expected to result in an immediate shift in global supply, it was enough to send oil to its third straight weekly gain and extend a rally in energy credit that began over six months ago. High yield energy bonds returned approximately 1.2% during the week ended August 19, bringing year-to-date returns to over 27.9%.7 By price, high yield energy bonds have now returned to levels not seen since July 2015.6 Similarly, senior secured energy loans generated a one-week return of over 1.1%, bringing the year-to-date return to nearly 16.7%.8 For added perspective, high yield energy bonds and senior secured energy loans have generated a return of approximately 4.2% and -11.2%, respectively, over the past 12 months.6,7
Investors were looking to the minutes from July’s FOMC meeting for guidance on whether the U.S. Federal Reserve is likely to raise interest rates by year-end. Instead, they received a somewhat mixed message, with Fed officials appearing hesitant to commit to a time frame for their next move.9 While some Fed officials showed a preference for holding off on raising rates due to low inflation, others indicated their support for raising rates soon as labor markets appear to be moving towards full employment. The end result was mostly the same wait-and-see approach evident in much of the Fed’s communications throughout 2016. Taken from the FOMC July meeting minutes, “members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity.”8 Taken together, the minutes were viewed as relatively uneventful and added to a week of mixed signals regarding the central bank’s outlook on interest rates.
Earlier in the week, Federal Reserve Bank of San Francisco President, John Williams, published a paper calling on central banks to rethink monetary policies for the coming cycles.10 In it, Williams said long-term interest rates are likely “to stay lower than we’ve come to expect in the past” due to shifting demographics and slower productivity and economic growth.9 However, the somewhat dovish tone of the paper was offset by remarks Williams made later in the week (and echoed by New York Fed President William Dudley), saying that the central bank should move to raise interest rates “sooner rather than later.”11 Investors now turn their attention to next week’s central bank gathering in Jackson Hole, Wyoming, which U.S. Fed Chair Janet Yellen may (or may not) use as an opportunity to send a message to the markets regarding the potential for a September rate hike.
Chart of the week: Resilient energy
- Oil prices increased this week, benefiting from renewed hopes that the world’s largest producers might freeze production when they meet in September. The price of oil climbed more than $4 on the week, rising above the $48 mark, and is now nearly 20% above its August 2 low.4
- Credit investors have benefited from oil’s increase, with energy loans up nearly 0.35% month to date and high yield energy bonds up approximately 3.1% over the same time frame.7,6 Year to date, energy remains among the top-performing industries across both senior secured loans and high yield bonds.
- Much of the year-to-date return comes from energy’s strong recovery in March and April. Yet both energy loans and high yield bonds displayed a level of resiliency through June and July, having generated positive total returns during a period when oil prices fell approximately 22%.4,6,7
- Although many analysts anticipate that oil prices could remain volatile as market participants continue to navigate through challenging industry conditions, such a decoupling of credit markets from oil prices has been an important driver of total returns through the summer months.
1 Reuters: http://goo.gl/bRbAUZ.
2 Bank of America Merrill Lynch High Yield Master II Index.
3 Thomson Reuters Lipper.
4 Credit Suisse Leveraged Loan Index.
5 Federal Reserve Bank of St. Louis, https://goo.gl/hbup9D.
6 U.S. Energy Information Administration, http://goo.gl/zzJpM.
7 Bank of America High Yield Energy Index.
8 Credit Suisse Leveraged Loan Index (Energy Component).
9 U.S. Federal Reserve, https://goo.gl/2hWk55.
10 Federal Reserve Bank of San Francisco, http://goo.gl/5Y4KOZ.
11 Barrons, http://goo.gl/qgYJjU.
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