A late-month rally
Corporate credit and equity markets notched gains this week as attention shifted away from events in Washington, DC, and back toward economic data.1 High yield bonds rose during the week ended March 30, yet returns for the month of March will likely end in negative territory as investors absorbed a rapid change in the Fed narrative, a rise in U.S. Treasury yields and a decline in oil prices.1,2 With more than $7 billion in outflows in March, high yield bonds unwound almost all of the inflows into the asset class since the November presidential election.3 Even with the March decline, high yield bonds have generated year-to-date returns of 2.6%, compared to 1.3% and 0.6% for investment-grade bonds and 10-year U.S. Treasury notes, respectively.2,4 For context, the S&P 500 Index has returned 5.9% year to date.5
While returns for senior secured loans were roughly flat for the month of March, the asset class has returned approximately 1.1% year to date.6 Bank loan mutual funds have now recorded their 20th consecutive week of inflows, totaling more than $19 billion in that time frame, as investors have sought asset classes whose values are less impacted by changes in interest rates.3
Market sentiment changed rapidly this week after the Conference Board released data indicating that the Consumer Confidence Index (CCI) reached its highest level since December 2000.6 According to a consensus estimate from Reuters, economists had expected the CCI to reach 114 in March, yet the index jumped to 125.6.7 The University of Michigan Index of Consumer Sentiment also rose slightly in March, underscoring the broad sense of optimism among consumers in recent months.8 However, consumer spending came in slightly below expectations in February and was little changed from January, highlighting what has become a pronounced disparity at times between measures of consumer or economic sentiment and hard economic data.9 In its final estimate for the fourth quarter of 2016, the Bureau of Economic Analysis revised gross domestic product higher, from 1.9% to 2.1%. The final number still represented a notable decline from the economy’s 3.5% growth rate just one quarter earlier.10 Looking ahead, the Federal Reserve Bank of Atlanta downgraded its forecast for GDP growth in the first quarter of 2017 to 1.0%.11
The long view
In what seemed like only a footnote to economic and market news this week, Prime Minister Theresa May triggered Article 50 of the Lisbon Treaty, formally beginning the United Kingdom’s exit process from the European Union.12 According to the treaty, the two sides now have two years to negotiate all terms of the departure.12 The lack of market reaction on Thursday was a notable contrast to the significant agita that markets around the world experienced the weeks leading up to the Brexit vote. Whereas yields on developed market sovereign debt, including the 10-year U.S. Treasury note, reached historic lows in the days after the Brexit referendum in June 2016, investors appeared to be largely focused elsewhere on Thursday, the day that Article 50 was finally triggered.13 In fact, the yield on the 10-year Treasury note actually rose approximately four basis points on Thursday as investors digested comments indicating that the European Central Bank remains committed to keeping interest rates at current or even lower levels for the foreseeable future.13,14 Now that the Brexit is actually in motion and markets have managed through several other macro-level surprises since the June 2016 vote, investors appear to be taking the long view.
Chart of the week: Slow and steady senior secured loans
- Credit investors this month experienced their first notable bout of volatility in more than a year as the Federal Reserve quickly pivoted toward a more hawkish tone, oil prices declined and inflows into high yield bond and bank loan mutual funds, which had been relatively consistent earlier in the year, either moderated or turned negative.3
- Within this environment, senior secured loan prices saw a more muted decline compared to a more significant decline in high yield bond prices. In the first two weeks of March, for example, when investor sentiment first began to decline, high yield bond prices fell more than two dollars. Prices on senior secured loans in the same time frame actually climbed by several pennies.15
- More recently, high yield bonds have moved off their March low and prices on both senior secured loans and high yield bonds are generally flat year to date.15
1 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
2 Bank of America Merrill Lynch U.S. High Yield Master II Index.
3 J.P. Morgan High-Yield and Leveraged Loan Morning Intelligence, March 31, 2017 based on data from Thomson Reuters Lipper.
4 Bank of America Merrill Lynch U.S. Corporate Master Index.
5 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
6 The Conference Board, http://bit.ly/1eu7yyH.
7 CNBC, http://cnb.cx/2ouePvA.
8 University of Michigan Surveys of Consumers, http://bit.ly/1gDEQwe.
9 U.S. Bureau of Economic Analysis, http://bit.ly/2ogUjlr.
10 U.S. Bureau of Economic Analysis, http://bit.ly/2ooRgF0.
11 Federal Reserve Bank of Atlanta, http://bit.ly/2d0r68Y.
12 The Wall Street Journal, http://on.wsj.com/2ofj1j9.
13 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
14 Reuters, http://reut.rs/2oEHpKF.
15 Prices on the Bank of America Merrill Lynch U.S. High Yield Master II Index and the Credit Suisse Leveraged Loan Index between February 28 and March 13.
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