Multi-year lows

Corporate credit prices trended lower this week amid an accelerating slide in long-dated U.S. Treasury yields and a decline in oil prices.1,2 High yield bonds returned -0.49% during the week ended June 22 and slipped into negative territory for the month as high yield bond mutual funds recorded their first weekly outflow in four weeks.3,4 High yield bonds are now providing returns of -0.26% month to date, with BB rated bonds outperforming the broader benchmark index and energy high yield bonds and CCC rated bonds underperforming.3,5,6,7 BB rated bonds and CCC rated bonds are providing month-to-date returns of approximately 0.21% and -0.97%, respectively, as investors now appear to be migrating up the credit ratings spectrum following a 12-month stretch that saw CCC rated bonds return approximately 21.9%.5,7 Senior secured loans were modestly lower this week as bank loan mutual funds registered only the third weekly outflow in 47 weeks.4 Month to date, senior secured loans are providing returns of -0.18% with energy senior secured loans and CCC rated loans both notable underperformers.8,9,10 Despite this past week’s trading activity, high yield bond yields and senior secured loan yields remain near multi-year lows at 5.68% and 6.10%, respectively.11,12


Lower oil prices

Oil prices declined to a seven-month low this week as investors largely looked past data showing shrinking U.S. oil inventories to focus instead on rising global production.2 U.S. oil inventories fell by 2.5 million barrels in the week ended June 16, according to the U.S. Energy Information Administration, while U.S. gasoline stockpiles decreased by 578,000.13 Despite these larger-than-expected declines, investors appeared to focus on higher U.S. shale and Libyan production.14 The oil price decline added to uncertainty around the inflation outlook, helping to send the yield on the 30-year U.S. Treasury bond to its lowest level this year and the yield premium between the 30-year bond and five-year note to its lowest level since 2007.1,15 The decline in oil prices could lower inflation expectations going forward and call into question the U.S. Federal Reserve’s plan to continue tightening monetary policy.


Gradual approach

The debate around inflation expectations and the future path of interest rates has intensified in recent weeks. Bond investors have continued to question how rapidly the Fed will be inclined to raise rates in light of last week’s disappointing consumer price index (CPI) data, with the first-year forward inflation expectation rate slipping to 1.61% after sitting above 2.0% for most of the first quarter.16,17 Last week Fed Chair Yellen said that monetary policy is not on a preset course, signaling the U.S. central bank’s flexibility on its normalization plan.18 This sentiment was largely echoed this week by a pair of Fed officials who emphasized a gradual approach to raising rates. Chicago Fed President Evans on Tuesday said the central bank can wait to raise rates, while Boston Fed President Rosengren said lower rates may be a more permanent feature in the market.19,20


Chart of the week: Middle market yields


    • Strong demand and declining yields have ushered in a wave of refinancings within the senior secured loan market in 2017. As we noted in early May, for example, year-to-date new senior secured loan issuance rose approximately 55% due to refinancings.21
    • However, refinancing activity has been significantly more prominent within the large corporate senior secured loan market than it has been among middle market issuers.22
    • According to Thomson Reuters, new issuance within the large corporate market (outside of refinancing activity) has declined to an all-time low of approximately 33%.22 This means that most new senior secured loans issued by large corporations are being used to refinance existing debt at a lower rate.
    • Within the middle market, the solid majority of senior secured loans (approximately 72%) have been issued as new debt, rather than to refinance or reprice existing debt.22
    • The new issuance dynamics across these markets have helped to support today’s middle market yield premium, which sits approximately 133 basis points above large corporate loans and above its average since the first quarter of 2011.22

    1 Federal Reserve Bank of St. Louis, http://bit.ly/29ecFfc.
    2 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
    3 Bank of America Merrill Lynch U.S. High Yield Master II Index
    4 Thomson Reuters Lipper.
    5 Bank of America Merrill Lynch U.S. High Yield BB Rated Index.
    6 Bank of America Merrill Lynch U.S. High Yield Energy Index.
    7 Bank of America Merrill Lynch U.S. High Yield CCC and Lower Rated Index.
    8 Credit Suisse Leveraged Loan Index.
    9 Credit Suisse Leveraged Loan Index (energy component).
    10 Credit Suisse Leveraged Loan Index (CCC rated component).
    11 Bank of America Merrill Lynch U.S. High Yield Master II Index (yield-to-worst).
    12 Credit Suisse Leveraged Loan Index (based on a three-year maturity).
    13 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
    14 The Wall Street Journal, http://on.wsj.com/2tC9mWy.
    15 MarketWatch, http://on.mktw.net/2sLw7t9.
    16 U.S. Department of Labor, http://bit.ly/2k22igk.
    17 Federal Reserve Bank of St. Louis, http://bit.ly/2tWGcRn.
    18 CNBC, http://cnb.cx/2t2NU0b.
    19 The Wall Street Journal, http://on.wsj.com/2sMk9zB.
    20 MarketWatch, http://on.mktw.net/2slLdF7.
    21 J.P. Morgan High-Yield and Leveraged Loan Morning Intelligence, April 28, 2017.
    22 Thomson Reuters LPC Middle Market Weekly, The Middle Market Opportunity, June 16, 2017. Based on sponsored new issuance.


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