Corporate credit prices rose this week on the back of solid corporate earnings, a decline in U.S. government bond yields and another record high for U.S. stocks.1,2,3 High yield bonds posted another weekly gain, capping off a July in which the asset class provided total returns of approximately 1.15%.4 It was the fourth consecutive month of positive returns for the asset class and brings the year-to-date return to approximately 6.19%.4 High yield bonds remain one of the better-performing fixed income asset classes in 2017, outperforming both investment grade bonds (5.14%) and U.S. 10-year Treasuries (2.95%) through the first seven months of 2017.2,5 Corporate credit fundamentals remained generally stable in July, with the trailing 12-month high yield bond default rate declining to a relatively modest 1.21%.6 As default rates ticked lower, investors continued to migrate down the credit-rating spectrum in exchange for a pickup in yield. Year to date, CCC rated bonds are providing gains of approximately 8.73%, outperforming both B rated bonds (5.70%) and BB rated bonds (5.83%).7,8,9 Despite a slight rise over the past two weeks, high yield bond yields remain near three-year lows, currently sitting at approximately 5.45%. For perspective, that is down from a 2017 high of 6.19% and 10.10% in February 2016.10
Senior secured loans continued to experience gains in July, returning approximately 0.78% last month as flows into the asset class remained strong.11 July marked the thirteenth consecutive month of net inflows into bank loan mutual funds for a total of more than $33 billion over that span.12 Year to date, senior secured loans are now providing a total return of approximately 2.77%, with CCC rated senior secured loans (5.72%) outperforming their higher-rated peers.11,13,14,15 Performance has been steady across almost all industries, with the retail sector standing out as the only negative performer of 2017.16 With average prices now sitting at 97.72% of par, senior secured loans currently yield approximately 5.89%.17 For perspective, that is down from 6.13% at the end of June and from 6.30% at the beginning of the year.17
We’ve got jobs
With the release of the July nonfarm payrolls report, investors received more insight into the labor market and inflation picture on Friday.18 At 209,000, the number of jobs added in July topped analyst expectations and helped to bring the headline unemployment rate to 4.3%, matching a 16-year low.19 The decline in unemployment came even as the labor participation rate edged up to 62.9%, consistent with a steady pace of hiring and a tightening labor market.18 A rise of 0.3% in average hourly earnings and an unchanged work week of 34.5 hours, however, showed just a modest rise in wage growth.18 One of the factors holding back inflation has been sluggish wage growth, and this week’s report is the latest in a string of data showing the U.S. economy continues to grow at a slow and steady pace, while inflation remains subdued. Nevertheless, Friday’s jobs report does little to alter investor expectations that the U.S. Federal Reserve will move to begin reducing its balance sheet in September and raise interest rates again in December.19
Chart of the week: Inflation pressures recede again
- Jobs data released this week showed that the domestic employment picture remained robust in July. According to the Bureau of Labor Statistics, the U.S. economy added 209,000 jobs and the unemployment rate ticked down to 4.3%.18
- Before July’s employment report was released this week, Boston Fed President Eric Rosengren noted in an interview that he sees “some reasonable risk” the unemployment rate will fall below 4.0% in the next two years.20 He echoed some other members of the Fed, saying that tight labor markets would keep the FOMC on its path toward gradually raising interest rates.20
- However, weakening inflation pressures this year appear to be undermining the Fed’s plan to gradually normalize the federal funds rate. For example, the personal consumption expenditures (PCE) index, the Fed’s preferred measure of inflation, fell to 1.4% in June 2017.21 After reaching 2.2% in February 2017, the index has fallen in each month since.21 The core PCE index has followed a similar pattern, standing flat for the second straight month at 1.5% in June.21
- Globally, consumer prices have seen similar trends. The Organisation for Economic Co-operation and Development (OECD) this week released a report highlighting a slowdown in global inflation data. Across G20 nations, for example, annual inflation in June 2016 rose at its slowest pace since 2009, just 2.0%.22
1 The Wall Street Journal, http://on.wsj.com/2vb5lwa.
2 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
3 Federal Reserve Bank of St. Louis, http://bit.ly/2jZjDYt.
4 Bank of America Merrill Lynch High Yield Master II Index.
5 Bank of America Merrill Lynch Corporate Master Index.
6 J.P. Morgan Default Monitor, August 1, 2017.
7 Bank of America Merrill Lynch High Yield CCC & Lower Rated Index.
8 Bank of America Merrill Lynch High Yield B Rated Index.
9 Bank of America Merrill Lynch High Yield BB Rated Index.
10 Bank of America Merrill Lynch High Yield Master II Index (yield-to-worst).
11 Credit Suisse Leveraged Loan Index.
12 Thomson Reuters Lipper.
13 Credit Suisse Leveraged Loan Index (CCC rated component).
14 Credit Suisse Leveraged Loan Index (B rated component).
15 Credit Suisse Leveraged Loan Index (BB rated component).
16 Credit Suisse Leveraged Loan Index (Retail component).
17 Credit Suisse Leveraged Loan Index (yield to a three-year takeout).
18 Bureau of Labor Statistics, http://bit.ly/2iYbHWM.
19 Reuters, http://reut.rs/2v3Aqkp.
20 The Wall Street Journal, http://on.wsj.com/2waYbWf.
21 Bureau of Economic Analysis, http://bit.ly/2mOhSP0.
22 OECD, http://bit.ly/2u58yJH.
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