July rebound
Corporate credit prices generally rose this week, benefiting from a combination of solid corporate earnings, rising oil prices and a fresh record for the S&P 500.1,2,3 High yield bonds delivered another week of positive returns, generating a total return of 0.19% during the week ended July 27.4 Following a weak start to July, high yield bonds have since erased all declines sustained during the first week of the month and are now on track for a monthly gain of approximately 1.14%.4 For high yield bonds, July would mark the fourth consecutive month of positive returns as investors continued to migrate toward the higher-yielding corners of the fixed income market.4 CCC rated bonds have continued to outperform as investors show a willingness to move down the ratings spectrum in search of yield. Month to date, CCC rated bonds are providing returns of approximately 1.73%, while B rated and BB rated bonds are returning 1.15% and 0.96%, respectively.5,6,7 Although more modest than high yield bond returns, senior secured loans are on track for their strongest monthly return since December.After registering a modest decline in June, senior secured loans are now providing month-to-date returns of 0.71%, with energy senior secured loans outperforming the broader benchmark index.8,9

Declining stockpiles
Energy credit was again in focus this week as oil prices rose to a two-month high on the back of positive U.S. data and a renewed commitment from OPEC to curb output.2,10 This week, the U.S. Energy Information Administration said U.S. crude stockpiles declined by 7.2 million barrels in the week ended July 21, against analyst expectations of a 2.6 million-barrel drop.11,12 U.S. oil stockpiles have now declined by more than 52 million barrels since the end of March, providing investors with some level of confidence that oil supply and demand is beginning to rebalance.13,14 Energy credit reacted favorably to this week’s nearly 5% rise in oil prices, with high yield energy bonds returning 0.18% and senior secured energy loans returning 1.09%.9,15 After rising to as high as 7.38% earlier this month, high yield energy bond yields have since tightened to approximately 6.78%, representing a nearly 1.8% yield premium to the broader high yield index.16 Sitting at approximately 11.22%, senior secured energy loan yields have declined approximately 89 basis points since the beginning of July and offer a premium of approximately 5.26% to the broader senior secured loan index.17

Below target
Ahead of this week’s meeting of the Federal Open Market Committee, investors were looking for fresh signals about the U.S. Federal Reserve’s views on inflation and whether it would provide a more specific timeline for when it will begin running off its bond portfolio. Aside from a few tweaks, however, language in this latest statement closely resembled the prior one and provided few new insights into the path for interest rates.18 Whereas the Fed previously said it would begin shrinking its balance sheet “this year,” the committee now says it will begin “relatively soon.”18,19 It also said that inflation is running “below” the Fed’s two percent target instead of “somewhat below,” a tweak that may indicate the Fed is slightly more dovish on inflation.18,19 Taken together, however, the Fed offered little to suggest it has altered its plan to raise interest rates once more this year. Meanwhile, the advance estimate of Q2 GDP confirmed expectations of a rise in growth following the tepid start to the year.20 While Friday’s GDP report was generally viewed as solid, with consumer spending rising strongly, there was little in the way of inflation.21 Excluding food and energy, the personal consumption expenditures (PCE) index rose just 0.9% in the second quarter, compared to an increase of 1.8% in the first quarter.20

Chart of the week: Energy on the upswing    

  • Energy investors experienced volatility during the first half of 2017 as persistent oversupply concerns and doubts about the efficacy of OPEC’s output cut dragged on oil prices. Prices on West Texas Intermediate crude oil fell more than 14% in the first half of 2017.2
  • On a relative basis, master limited partnership (MLP) and energy credit indexes fared better than oil itself but, as the chart highlights, still finished the first half of the year either in negative or mildly positive territory.22
  • In July, however, the makings of a more constructive picture have emerged for both oil prices and energy investors. Stockpiles of crude oil globally have drawn down significantly in recent months – in the U.S., stockpiles this week fell below last year’s levels.14 Additionally, crude oil production in the U.S. fell in the second half of July, perhaps a result of lower commodity prices.23
  • Within this environment, major energy investments saw the beginnings of a turnaround, with month-to-date returns on major MLP, high yield bond and senior secured loan energy indexes exceeding those of the prior six months.22

1 Reuters, http://reut.rs/2v6oTBg.
2 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
3 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
4 Bank of America Merrill Lynch High Yield Master II Index.
5 Bank of America Merrill Lynch High Yield CCC Rated & Lower Index.
6 Bank of America Merrill Lynch High Yield B Rated Index.
7 Bank of America Merrill Lynch High Yield BB Rated Index.
8 Credit Suisse Leveraged Loan Index.
9 Credit Suisse Leveraged Loan Index (energy component).
10 The New York Times, http://nyti.ms/2h8P2dp.
11 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
12 Dow Jones Newswires, http://fxn.ws/2tJPpwW.
13 Dow Jones Newswires, http://bit.ly/2tPMMxC
14 U.S. Energy Information Administration, http://bit.ly/2ueQorn.
15 Bank of America Merrill Lynch High Yield Energy Index.
16 Bank of America Merrill Lynch High Yield Energy Index (yield-to-worst).
17 Credit Suisse Leveraged Loan Index (energy component, yield to a three-year takeout).
18 U.S. Federal Reserve, http://bit.ly/2tDmgDs.
19 U.S. Federal Reserve, http://bit.ly/2s5LDj5.
20 U.S. Department of Commerce, http://bit.ly/1DqcVBJ.
21 Bloomberg, https://bloom.bg/2tJ6I10.
22 Alerian MLP Index; Bank of America Merrill Lynch High Yield Energy Index; Credit Suisse Leveraged Loan Index (energy).
23 Bloomberg, based on U.S. Department of Energy data.

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