Corporate credit prices were relatively stable this week amid a decline in government bond yields, lower oil prices and fluctuating U.S. equities. High yield bond prices declined at the outset amid a 6-month high for the CBOE volatility index, only to rise toward week’s end in response to a rally in equities.1,2 All told, high yield bonds generated a positive total return for the week ended April 20 and are now providing returns of approximately 0.39% for the month of April.3 Meanwhile, high yield bond mutual funds reported an outflow of approximately $362 million for the week ended April 19.4 Although mild, it was the second straight week of outflows from the asset class, for a total of $708 million over that span.4 Amid a modest uptick in market volatility associated with heightened geopolitical risks and uncertainty around the French presidential election, high yield bond yields have widened slightly in recent weeks. From a 2.5-year low of 5.57% in March, high yield bond yields have since widened to approximately 5.79%.5 For perspective, however, yields began the year at approximately 6.10% and are well down from the 10.90% of February 2016.5
LIBOR: Above the floor
Senior secured loans were up modestly this week, providing returns of approximately 0.10% for the week ended April 20.6 Throughout the year, demand for the asset class has been driven, in part, by the search for investments whose values are less affected by rising interest rates and rising LIBOR. Three-month LIBOR is currently sitting at an eight-year high of 1.15%, up from 0.85% in November, and is now comfortably above the floor featured in the majority of senior secured loans.7,8 Amid declining government bond yields and a flatter yield curve, senior secured loan funds recorded the lightest weekly inflow since the mid-November presidential election. For reference, bank loan mutual funds have now reported inflows in 37 of the past 38 weeks totaling over $24 billion over that span.4 Amid ongoing investor demand, yields for senior secured loans continue to tighten. Sitting at approximately 6.30% at the beginning of the year, senior secured loans are currently yielding 6.10%. Month to date, senior secured loans are providing returns of approximately 0.33%.6 By comparison, the S&P 500 has returned -0.51%, high yield bonds have returned 0.39% and investment grade corporate bonds have returned 1.06%.10
French election momentum shift
Weighing on government bond yields this week was a shift in data momentum, geopolitical risks and uncertainty around the first round of the presidential election in France. Notably, bond yields declined early in the week in a catch-up reaction to the weaker-than-expected retail sales figures and U.S. CPI data released last Friday.11,12 Government bond prices received some added support later in the week amid polls suggesting a tightening French election ahead of Sunday’s first-round vote. The developments boosted demand for safe-haven assets, driving the yield on the U.S. 10-year Treasury close to 2.2% for the first time since the U.S. presidential election.13 Amid the flattest yield curve since November, odds of a rate hike during the U.S. Federal Reserve’s May 2–3 and June 13–14 meetings dipped slightly, with Fed funds futures currently implying an 11% probability of a rate hike at next month’s meeting and a 55% chance of a rate hike in June.14,15
Chart of the week: OPEC’s long game
- Oil prices declined this week after the U.S. Energy Information Administration’s (EIA) Weekly Petroleum Status Report revealed that stockpiles of gasoline in the U.S. unexpectedly rose approximately 1.5 million barrels last week.16,17 The report was a reversal from recent weeks’ declines and was far above the consensus forecast for a nearly 2 million barrel inventory draw.18
- Looking beyond the oil market’s daily price swings, however, a constructive supply-demand dynamic appears to be emerging through the remainder of 2017.17
- In fact, oil markets are gradually working their way through the oversupply of recent years, a sign that OPEC’s November 2016 decision to cut output has been slowly taking effect.
- Should OPEC extend the agreement at its May 2017 meeting, both the IEA and OPEC generally agree in their forecasts that oil inventories, which were estimated to be as high as 1.9 million barrels per day in early 2016, will be drawn into negative territory in the second half of 2017.19
- The IEA looks for oil inventories to decline by as much as 1.8 million barrels per day in the fourth quarter of 2017, while OPEC forecasts a more modest decline of approximately 500,000 barrels per day.19
1 Federal Reserve Bank of St. Louis, http://bit.ly/295DSwP.
2 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
3 Bank of America Merrill Lynch High Yield Master II Index.
4 Thomson Reuters Lipper.
5 Bank of America Merrill Lynch High Yield Master II Index (yield-to-worst).
6 Credit Suisse Leveraged Loan Index.
8 Seeking Alpha, http://bit.ly/2oZpbor.
9 Credit Suisse Leveraged Loan Index (based on a three-year maturity).
10 Bank of America Merrill Lynch Corporate Master Index.
11 U.S. Census Bureau, http://bit.ly/Y4FaTF.
12 U.S. Department of Labor, http://bit.ly/2jKLr2f.
13 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
15 Federal Reserve Bank of St. Louis, http://bit.ly/2oMWaP2.
16 Bloomberg, based on CME data.
17 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
18 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
19 Reuters, http://reut.rs/2pIb3Tl.
20 Bloomberg Gadfly, https://bloom.bg/2pmBvz4.
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