Corporate credit was relatively stable this shortened holiday week amid declining U.S. equity prices, rising oil prices and falling Treasury yields.1,2 High yield bond prices weakened slightly toward week’s end as geopolitical concerns weighed on investor sentiment.3 Outflows from high yield bond funds resurfaced as the CBOE Volatility Index rose to a six-month high, with investors withdrawing approximately $348 million during the week ended April 12, reversing some of the $2.4 billion inflows the week prior.4,5 Month to date, high yield bonds are now providing returns of approximately 0.27%, with high yield energy bonds an outperformer.5,6 Senior secured loans rose modestly throughout the week, as bank loan mutual funds recorded their 22nd consecutive weekly inflow for a total of $20.4 billion over that span.5 Month to date, senior secured loans are providing returns of approximately 0.26%.7 Year to date, senior secured loans have generated returns of 1.47%, with energy senior secured loans a strong outperformer, having generated a return of nearly 5.7% in 2017.7,8
Close to balance
Oil prices were in focus this week, rising for a third straight week and recouping more of last month’s declines.9 Despite rising U.S. output, oil prices remained relatively resilient amid reports that OPEC production fell in March and that Saudi Arabia will seek to extend the current output cuts when OPEC next meets on May 25.10,11 In its monthly report, OPEC said its production decreased by 153,000 barrels per day in March, but raised its U.S. supply growth forecast by 200,000 barrels a day for 2017.10 “The number of drilling rigs and the reactivation of companies’ spending are the two most important factors leading to an expected output surge in the coming months,” OPEC said, citing the 374 year-over-year increase in oil drilling rigs. Nevertheless, world oil supply fell by 755,000 barrels per day in March, with the International Energy Agency arguing “confidently that the market is already very close to balance.”12
Geopolitical developments contributed to some increased market volatility this week, with U.S. Treasury yields slipping to a five-month low.2 Contributing to the decline were comments from President Trump Wednesday suggesting that the U.S. dollar is too strong and that he would prefer the U.S. Federal Reserve keep interest rates low.13 Military action abroad offered further support for safe-haven assets, sending U.S. equities lower and the U.S. Treasury yields to their largest one-week decline since last June.1 Some U.S. economic data disappointed, raising concerns over growth momentum. This week’s economic calendar included Friday’s consumer price index (CPI) and retail sales figures, both of which underwhelmed. For CPI, March inflation was weaker than expected, with the headline figure falling 0.3% month over month and core CPI down 0.1% in March in what was the first monthly decline since 2010.14 U.S. retail sales fell in March, down 0.2% from the prior month, as inflationary pressures appear contained.15 Nevertheless, sentiment-based economic data continues to improve, as the University of Michigan index of consumer sentiment rose to the highest level since January 2015 in the preliminary April estimate.16
Chart of the week: Two (hikes) and out?
- 10-year U.S. Treasury yields reached a year-to-date low this week in response to President Trump’s suggestion to The Wall Street Journal that he “like[s] a low interest rate policy” and is open to keeping Fed Chair Janet Yellen in place for another term.2,13 At the same time, the U.S. dollar retreated after he noted that “our dollar is getting too strong.”13
- Both moves highlight a broader trend that has taken shape in recent weeks, with markets retracing some of the so-called “reflation trade” that took hold after the November U.S. presidential election.
- To this end, market-implied inflation expectations have declined considerably in the first two weeks of April.17 As the chart highlights, investors also have become more skeptical that the Fed will follow through on the three rate hikes it had originally projected for 2017.18,19
- Investors now assign a probability of just 31% that the FOMC will enact three rate hikes this year, a decline of approximately 6% in just one week.18
- Despite the Fed’s intentions to pull back from the era of extremely stimulative monetary policy, investors appear to be confirming their belief that we have not yet exited the “lower for longer” environment of recent years.20
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 Federal Reserve Bank of St. Louis, http://bit.ly/295DSwP.
5 Thomson Reuters Lipper.
6 Bank of America Merrill Lynch High Yield Energy Index.
7 Credit Suisse Leveraged Loan Index.
8 Credit Suisse Leveraged Loan Index (energy component).
9 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
10 Organization of the Petroleum Exporting Countries, http://bit.ly/2nJ0vmL.
11 Bloomberg News, https://bloom.bg/2mzsgtp.
12 International Energy Agency, http://bit.ly/1ylJ2td.
13 The Wall Street Journal, http://on.wsj.com/2ofc6W4.
14 U.S. Department of Labor, http://bit.ly/2jKLr2f.
15 U.S. Census Bureau, http://bit.ly/Y4FaTF.
16 University of Michigan, http://bit.ly/1gDEQwe.
17 Federal Reserve Bank of St. Louis, http://bit.ly/2pee7n5.
19 Federal Reserve summary of economic projections, December 2016, http://bit.ly/2h1fW2h.
20 The Wall Street Journal, http://on.wsj.com/2nySUr7.
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