Corporate credit was modestly higher this week amid reduced investor concerns around geopolitical risk, a rally in U.S. equities and generally stable U.S. government bond yields.1 High yield bond prices rose throughout the week amid light new-issue volume and some moderate inflows into the asset class. Month to date, high yield bonds are providing returns of approximately 0.99%, more than making up for the -0.21% the asset class generated in March.2 High yield bond mutual funds recorded an inflow of $291 million for the week ended April 26, snapping two straight weeks of outflows.3 Senior secured loan returns were slightly positive this week, as the majority of new-issue volume continued to be dedicated to refinancing activity.4,5 Bank loan mutual funds recorded a 24th consecutive week of inflows for a total of $20.9 billion over that span.3 Ongoing demand, coupled with an uptick in refinancing activity, has contributed to some yield compression across both high yield bond and senior secured loan markets. Currently, high yield bonds and senior secured loans are yielding approximately 5.60% and 6.14%, respectively, down from 5.88% and 6.27% at the end of March.6,7
Investors looked past some bullish long-term developments to focus on the more near-term considerations, with U.S. oil supply concerns outweighing a potential OPEC extension of its agreed-to output cuts.8 Oil prices declined to one-month lows as investors weighed an unexpected rise in gasoline and diesel stockpiles.9 According to the U.S. Energy Information Administration, U.S. crude oil inventories declined by 3.6 million barrels last week, but gasoline and diesel stockpiles grew by 3.4 million barrels and 2.7 million barrels, respectively.10 The uptick in supply helped keep oil trading below $50 per barrel even as the International Energy Agency warned of a potential oil shortage as soon as 2020.11 Low oil prices impacted oil exploration in recent years, with oil discoveries falling to a record low in 2016 as companies cut spending, the agency said.10 Despite the recent decline in the underlying commodity, high yield energy bonds and energy senior secured loans have held in reasonably well. Month to date, high yield energy bonds and energy senior secured loans have returned approximately 0.55% and 1.25%, respectively.12,13
Steady but subdued
The French election results, solid corporate earnings and President Trump’s proposal to cut corporate taxes reverberated across the stock, bond and currency markets this week. Government bond yields rose modestly as the outcome from the first round of the French presidential election reduced investor concerns over a potential breakup of the Eurozone, but registered only a muted response to the tax proposal. U.S. 10-year Treasury yields around 2.3% continued to reflect some weaker-than-expected U.S. economic data, geopolitical tensions and skepticism over the prospects for large fiscal stimulus measures.14 This week, the Conference Board said its measure of consumer confidence declined slightly in April, but remained well above where it was last October.15 However, the ongoing optimism in this and other “soft” economic data has not yet been accompanied by similar gains in the “hard” economic data, such as Friday’s GDP numbers. In its advance estimate, the Commerce Department said GDP rose 0.7% in the first quarter, the slowest pace in three years, underpinned by a slowdown in consumer spending.16 While the first quarter has tended to be weak in recent years and GDP is expected to rebound in the second quarter, Friday’s report suggests the broader trend of steady but subdued economic growth remains intact.
Chart of the week: Credit markets back on track
- After more than a year of climbing steadily higher, credit markets took a break in March.17 Investors initially pulled back as the Federal Reserve adopted a hawkish tone ahead of its mid-March meeting, economic data softened and oil prices declined.
- Despite the almost month-long pause – where high yield bonds experienced a sharp decline in March versus senior secured loans’ slight drift downward – credit markets have largely picked up their earlier momentum once again in April.17 As the chart highlights, total returns on both high yield bonds and senior secured loans have now fully recovered from their March declines.17
- Year to date, high yield bonds and senior secured loans have returned approximately 3.7% and 1.6%, respectively.17 Across both asset classes, all industries but one (retail) have generated positive returns in 2017.17
- Notably, returns on energy senior secured loans and high yield bonds year to date, at approximately 5.6% and 3.0%, respectively, have both held in relatively well this year despite further declines in oil prices in recent weeks.18
- Despite the shorter-term setbacks that high yield bonds and senior secured loans have seen this year, we believe investors may still value them for the relative yield they continue to offer in today’s low-rate environment.
1 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
2 Bank of America Merrill Lynch U.S. High Yield Master II Index.
3 Thomson Reuters Lipper.
4 Credit Suisse Leveraged Loan Index.
5 S&P Leveraged Commentary and Data, http://bit.ly/2pGdRRl.
6 Bank of America Merrill Lynch U.S. High Yield Master II Index (yield-to-worst).
7 Credit Suisse Leveraged Loan Index (based on a three-year maturity).
8 Reuters, http://reut.rs/2qmErew.
9 Federal Reserve Bank of St. Louis, http://bit.ly/2oTfbMP.
10 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
11 CNBC, http://cnb.cx/2p8goT1.
12 Bank of America Merrill Lynch U.S. High Yield Energy Index.
13 Credit Suisse Leveraged Loan Index (energy component).
14 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
15 The Conference Board, http://bit.ly/1eu7yyH.
16 The U.S. Department of Commerce, http://bit.ly/1DqcVBJ.
17 Senior secured loans represented by the Credit Suisse Leveraged Loan Index. High yield bonds represented by the Bank of America Merrill Lynch U.S. High Yield Master II Index.
18 Energy senior secured loans represented by the energy component of the Credit Suisse Leveraged Loan Index. High yield bonds represented by the Bank of America Merrill Lynch U.S. High Yield Energy Index.
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