Against the backdrop of declining U.S. equities and a pullback in U.S. Treasury yields, corporate credit continued to tick higher this week. Despite a slide in U.S. Treasury yields, inflows remained robust, with bank loan mutual funds posting their fifth weekly inflow of over a billion since mid-November.1 For the week ended January 11, bank loan mutual funds reported $1.3 billion in inflows as investors continued to show a preference for fixed income investments whose values are less impacted by rising rates.2 Optimism over the prospect of expansive fiscal spending, lower taxes and lighter U.S. regulations has contributed to higher interest rates in recent months. In the weeks since the U.S. presidential election, bank loan mutual funds have experienced net inflows of more than $10 billion, and senior secured loans have returned approximately 2.13%.2,3 Despite a more mixed tone this past week, high yield bonds continued to benefit from rising corporate earnings, oil production cuts and growing investor confidence in the economic outlook.4 In the first few days of 2017, high yield bonds are providing returns of approximately 1.0%, with CCC rated bonds continuing to outperform the broader index.5,6
Oil prices remained in focus this week, with investors looking past a larger-than-expected build in U.S. inventories to focus on output cuts.7 Despite a slight decline sustained this past week, oil prices are up more than 18% since November, before OPEC agreed to cut production by 1.8 million barrels a day.8 On Thursday, Saudi Arabia’s oil minister said the country has cut its crude-oil production to below 10 million barrels a day, more than the 486,000 barrel-a-day cut that it had promised.9 Skepticism about whether oil-producing nations will adhere to the promised cuts has led to some oil price volatility in recent weeks, and the Saudi Arabia news provided investors some level of additional comfort. Alongside a sustained rally in oil prices, high yield energy bonds and senior secured energy loans continued to outperform. Building on the momentum sustained through the latter part of 2016, high yield energy bonds and senior secured energy loans are providing returns of approximately 1.7% and 3.0%, respectively, so far in January.10,11
U.S. retail sales and producer price data were the highlight of an otherwise light economic calendar. Retail sales rose slightly less than expected in December, rising 0.6% against consensus expectations of 0.7%.12 Excluding sales of cars and gasoline, retail sales were flat month over month, implying a modest pullback by consumers last month.13 While Friday’s report offered a mixed outlook for U.S. consumers, recent data implies ongoing economic optimism. The Index of Consumer Sentiment, which measures U.S. consumer confidence, rose nearly 5.0% in December from one month earlier.14 Likewise, the National Federation of Independent Business (NFIB) Index of Small Business Optimism rose 7.4 points in December to 105.8, the index’s highest reading since December 2004.15 Rounding out the week, producer prices rose 0.3% in December and by 1.6% in 2016.16 Excluding food and energy, producer prices rose by 1.7% over the past 12 months, slowing from November’s 1.8% increase.16 Though mixed, Friday’s economic data helped arrest the decline in U.S. Treasury yields seen earlier in the week. U.S. government bond yields rose across the curve Friday morning, with the 10-year Treasury yield rising above 2.4% and the 30-year Treasury yield returning to above 3.0%.17
Chart of the week: LIBOR breaches 1.00%
- Since late June 2016, three-month LIBOR has climbed nearly 40 basis points, reaching its highest point since 2009 and recently breaching the important 1.00% mark.18
- LIBOR’s movement in recent months has been partially a reaction to money market reforms issued by the U.S. Securities and Exchange Commission. It also has been consistent with the broader direction of other major interest rate benchmarks, which have risen precipitously in the second half of 2016. The 10-year Treasury note, for example, has risen more than 1.0%, or 100 basis points, since its July 2016 low.1
- LIBOR crossing 1.00% is important because virtually all of the senior secured loan market includes floors set at 1.00% or below. LIBOR floors set a minimum rate of yield should LIBOR drop below a stated level.
- With LIBOR currently at 1.02%, the coupons of potentially billions of dollars of senior secured loans will begin to increase to higher effective rates.
- As investors anticipate faster economic growth and inflation under the new administration, floating rate senior secured loans have experienced significant demand. At approximately $2.3 billion since the start of the year, inflows into bank loan mutual funds have more than tripled those into high yield bonds.19
- Looking over a longer time frame, bank loan mutual funds have taken in approximately $10 billion since November 2016. High yield bonds in the same time frame have seen inflows of approximately $4.9 billion.18
1 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
2 Thomson Reuters Lipper.
3 Credit Suisse Leveraged Loan Index.
4 The Wall Street Journal, http://on.wsj.com/2itNAOW.
5 Bank of America Merrill Lynch U.S. High Yield Master II Index.
6 Bank of America Merrill Lynch U.S. High Yield CCC and Lower Rated Index.
7 U.S. Energy Information Administration, http://bit.ly/1Fke1JG.
8 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
9 Barron’s, http://on.barrons.com/2jrJWpC.
10 Bank of America Merrill Lynch U.S. High Yield Energy Index.
11 Credit Suisse Leveraged Loan Index (Energy Component).
12 U.S. Department of Commerce, http://bit.ly/L7q3Tc.
13 The Wall Street Journal, http://on.wsj.com/2is788P.
14 University of Michigan Survey of Consumers, http://bit.ly/1gDEQwe.
15 NFIB Small Business Economic Trends, December 2016, http://bit.ly/2jbFpKh.
16 U.S. Department of Labor, http://bit.ly/2jfizlj.
17 Federal Reserve Bank of St. Louis, http://bit.ly/29ecFfc.
19 J.P. Morgan High Yield and Leveraged Loan Morning Intelligence on January 13, 2017, based on data from Thomson Reuters.
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