Outflows turn to inflows
Corporate credit was modestly lower this week amid a decline in U.S. equities, rising U.S. government bond prices and uncertainty around the outcome of healthcare reform.1,2 High yield bond prices declined slightly as lower oil prices and the first major setback for stocks since mid-November sapped risk appetite ahead of this week’s House vote to replace the Affordable Care Act.3 Month to date, high yield bonds have generated returns of approximately -1.3% amid higher new issuance and outflows from high yield bond mutual funds.4 This week’s inflow of $736 million into high yield bond mutual funds snapped a streak of three consecutive weekly outflows from the asset class totaling $8 billion.5 After declining to a 2.5-year low of 5.6% in early March, high yield bond yields have since widened to nearly 6.1%.6 Nevertheless, high yield bond returns remain positive for the year. Year to date, high yield bonds have returned approximately 1.6% with CCC bonds outperforming the broader index.3,7
Underpinning a more modest decline in senior secured loans this week was another large weekly inflow into bank loan mutual funds and ongoing demand from collateralized loan obligations (CLOs).4,5 Inflows into bank loan mutual funds totaled $694 million in the week ended March 22, marking the 19th consecutive weekly inflow for a total of $18.7 billion over that period.5 Senior secured loans were moderately lower alongside the first 1% decline for the S&P 500 in 110 trading sessions.1 However, the asset class remains relatively flat for March. Month to date, senior secured loans have returned -0.03%, outperforming the S&P 500 (-0.63%), high yield bonds (-1.31%), investment grade corporate bonds (-0.34%) and U.S. 10-year Treasuries (-0.38%) over the same period.1,3,8,9,10 Year to date, senior secured loans are now providing returns of approximately 1.09% after returning 9.88% in 2016 against the backdrop of an improved macroeconomic environment and rising LIBOR rates.8
U.S. 10-year Treasury yields declined to their lowest levels since February following last week’s signal from the U.S. Federal Reserve that it would be gradual in raising rates and uncertainty around this week’s healthcare bill vote.2,11 Progress on the American Health Care Act is being viewed as the first test of President Trump’s ability to deliver on the goal of tax reform, and this week’s uncertainty around its passage prompted investors to reassess expectations for how quickly Congress will be able to enact the rest of his pro-growth economic plans.12 Meanwhile, the remainder of this week’s economic calendar was relatively thin, with sales of existing homes coming in slightly below expectations and sales of new homes rising to a seven-month high.13,14 Durable goods orders rose 1.7% in February, with solid details that underscore the recent improvement in business sentiment indicators.15 Nevertheless, after recent speculation that the Fed could raise rates as many as four times in 2017, investor expectations have become more modest, with Fed funds futures now showing a less than 54% chance that the central bank will raise rates in June.16
Chart of the week: Treasury rates remain range-bound
- Markets have behaved in a generally uncharacteristic manner since the FOMC hiked interest rates at its meeting last week. The U.S. dollar index is down nearly 90 basis points since the FOMC made its move on March 15 while the 10-year Treasury note has fallen approximately 8 basis points.2,17
- Looking over a longer time frame, the yield on the 10-year U.S. Treasury note climbed steeply amid the broad market rally immediately after the U.S. presidential election. Following the initial climb, however, the yield has since generally remained range-bound, between approximately 2.3% and 2.6%.2
- Indeed, a wide range of consumer and investor sentiment metrics, from the University of Michigan Index of Consumer Sentiment to the Small Business Optimism Index, remain at or near their recent highs, appearing to justify the Treasury note’s initial jump.18,19
- Judging by recent market movements, however, including that of the 10-year Treasury note, investors seem to be scaling back earlier predictions that a new era of higher economic growth and inflation has emerged.
- With that, long-term interest rates continue to be relatively low by historical standards and investors seem to be confirming that we have not yet exited the “lower for longer” environment of recent years.
1 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
2 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
3 Bank of America Merrill Lynch High Yield Master II Index.
4 S&P Global Market Intelligence, Leveraged Commentary and Data.
5 Thomson Reuters Lipper.
6 Bank of America Merrill Lynch High Yield Master II Index (yield-to-worst).
7 Bank of America Merrill Lynch High Yield CCC and Lower Rated Index.
8 Credit Suisse Leveraged Loan Index.
9 Bank of America Merrill Lynch Corporate Master Index.
10 Bank of America Merrill Lynch 10-year U.S. Treasury Index.
11 U.S. Federal Reserve, http://bit.ly/2nobFgj.
12 The Wall Street Journal, http://on.wsj.com/2njXcRo.
13 National Association of Realtors, http://bit.ly/2l8xWdh.
14 U.S. Department of Commerce, http://bit.ly/NyyDuL.
15 U.S. Department of Commerce, http://bit.ly/1fKNCzo.
16 Bloomberg, based on CME data.
17 Bloomberg Dollar Spot Index.
18 University of Michigan surveys of consumers, http://bit.ly/1gDEQwe.
19 NFIB, Small Business Economic Trends, March 2017, http://bit.ly/Lg4Ndz.
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