In a week dominated by geopolitical headlines, corporate credit was unchanged to modestly weaker, with high yield bond prices slipping slightly toward week’s end amid a decline in oil prices.1,2,3 Nevertheless, high yield bond mutual funds recorded a second consecutive weekly inflow as investor demand for higher-yielding assets remained strong amid a general flattening of the U.S. Treasury yield curve.4,5 The asset class saw inflows of approximately $586 million during the week ended June 7, and approximately $1.1 billion over the past two weeks, as declining government bond yields reinforced investor demand for U.S. credit.4 High yield bonds generated returns of approximately -0.6% during the week ended June 8, as high yield energy bonds underperformed the broader benchmark.2,6 For context, high yield energy bonds returned approximately -1.34% this week as oil prices declined following an unexpected increase in U.S. oil and gasoline inventories.6,7 Year to date, high yield energy bonds are now providing returns of approximately 1.89%.6 This compares to approximately -11.65% for the S&P 500 Energy Index and -4.0% for the Alerian MLP Index.8 Meanwhile, high yield bond yields widened slightly this week, with yields for the high yield bond index now sitting at 5.56%, which compares to a 2017 low of 5.45% a week ago.9
In the black
Senior secured loans were modestly higher this week as bank loan mutual funds experienced improved inflows and collateralized loan obligation (CLO) issuance remained solid.10 Senior secured loan returns remained in the black, even as both high yield bond and investment grade corporate bond returns swung into negative territory.2,11,12 Year to date, senior secured loans are providing returns of approximately 2.1% and have generated positive returns in each of the past 15 months as investors have continued to seek out low-duration assets amid fluctuating short-term interest rate expectations and rising three-month LIBOR rates.11 Senior secured energy loans were down a modest 0.92% this week and are now providing year-to-date returns of 4.37%.13
This week’s macro calendar included the European Central Bank’s policy meeting, the U.K. election and congressional testimony from former FBI Director James Comey. All, save the U.K. election results, delivered few surprises, with bond investors focusing on the possibility that a weakened Conservative party may increase the odds of a “soft” Brexit.14 With the week’s geopolitical events behind them, bond investors turned their attention to next week’s U.S. Federal Reserve meeting and the path of interest rates during the second half of 2017.15 While a rate hike during the June 13–14 meeting is likely, some disappointing data and signs of decelerating inflation are raising questions about whether the central bank may stand pat during the balance of the year.16 The prospect of a “go-slow” Fed has helped to keep the U.S. 10-year Treasury yield near recent lows, bolstering investors’ hunt for income amid generally low global yields and low volatility and encouraging a general tightening of corporate yields.17
Chart of the week: Credit yields continue to drop
- Recent weeks have seen markets digest a patch of relatively disappointing economic data, including slowing payroll growth, softening inflation data and a decline in oil prices.18,19,20 Within this context, investors have begun to question whether the FOMC will raise interest rates again in 2017 after next week’s meeting and widely expected rate hike.
- Yields on the 10-year Treasury note fell to a post-election low of approximately 2.14% this week before moving back above the 2.20% mark.21
- Persistently low government bond yields in the U.S. and around the globe have helped to reinforce the strong demand that has underpinned U.S. credit markets in recent years, steadily lowering yields across many asset classes.
- Yields on investment grade bonds are 54 basis points below their recent peak in February 2016 while yields on high yield bonds have dropped approximately 458 basis points in the same time frame.2,12 According to J.P. Morgan, nearly 70% of high yield bonds currently yield 6% or below.22
- Despite a temporary post-election bounce, credit markets currently appear to show no signs of breaking out of the so-called “new normal” conditions of recent years in which yields and economic growth have both remained persistently low.
1 Bloomberg, https://bloom.bg/2s6cHQe.
2 Bank of America Merrill Lynch High Yield Master II Index.
3 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
4 Thomson Reuters Lipper.
5 Federal Reserve Bank of St. Louis, http://bit.ly/2oMWaP2.
6 Bank of America Merrill Lynch High Yield Energy Index.
7 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
9 Bank of America Merrill Lynch High Yield Master II Index (yield-to-worst).
10 J.P. Morgan High-Yield and Leveraged Loan Morning Intelligence, June 9, 2017.
11 Credit Suisse Leveraged Loan Index.
12 Bank of America Merrill Lynch Corporate Master Index.
13 Credit Suisse Leveraged Loan Index (energy component).
14 Reuters, http://reut.rs/2rUhRfq.
15 The Wall Street Journal, http://on.wsj.com/2sLaZAP.
16 The Wall Street Journal, http://on.wsj.com/2rMzReo.
17 The Financial Times, http://on.ft.com/2sbSIQ6.
18 Bureau of Labor Statistics, http://bit.ly/2hbEN7I.
19 Bureau of Economic Analysis, http://bit.ly/2mOhSP0.
20 West Texas Intermediate Cushing Crude Oil Spot Price.
22 J.P Morgan High-Yield and Leveraged Loan Morning Intelligence, June 8, 2017.
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