Corporate credit prices rose this week amid a fresh record for U.S. stocks, a rise in oil prices and easing concerns over the economic impact of Hurricane Irma.1,2,3 In a week that saw U.S. Treasury yields bounce off year-to-date lows and the CBOE Volatility Index decline approximately 7.5%, financial markets largely brushed off North Korea’s latest missile launch in a sign that investors are becoming more inured to the country’s provocations.4,5,6 High yield bond prices moved higher, with the asset class gaining approximately 0.14% during the week ended September 14 and now providing a month-to-date return of approximately 0.37%.7 Recall that high yield bonds generated a modest -0.03% decline in August, the first negative return for the asset class since March.7 Since widening to 5.80% in mid-August, high yield bond yields have since tightened to a one-month low of 5.54%.8 With yields at a favorable level for corporate borrowers, the new-issue calendar has become increasingly active, on track to exceed $16 billion for the week ended September 15.9 For context, high yield bonds remain one of the better-performing fixed income asset classes in 2017, returning approximately 6.49% year to date.7
Senior secured loans saw modest gains this week against the backdrop of rising U.S. Treasury yields, a decline in equity market volatility and an improved outlook for energy.10 Month to date, senior secured loans are providing returns of approximately 0.16% after August’s slight decline of -0.14%.10 Bank loan mutual funds recorded their sixth weekly outflow in the past seven weeks for a total of -$796.1 million over that span.11 However, when measured against the nearly $16.7 billion in net inflows and the approximately $74.6 billion in U.S. Collateralized Loan Obligation (CLO) issuance so far in 2017, this recent decline in demand represented by weekly outflows could be characterized as somewhat mild by comparison.11,12 With average secondary prices remaining near multiyear highs and yields near multiyear lows, corporate issuers continue to take advantage of the market dynamics to reduce their cost of capital.10 Year to date, refinancing activity represents nearly 40% of all senior secured loan issuance, with merger and acquisition and leveraged buyout activity comprising just 44% of all issuance.13
CPI is the new black
U.S. Treasury yields bounced sharply off last week’s year-to-date low after early estimates suggested that the damage from Hurricane Irma would be less severe than initially thought, and U.S. consumer prices rose in August by the most they have since January.4,14 With U.S. Federal Reserve officials recently linking inflation data to near-term interest rate policy, Thursday’s Consumer Price Index (CPI) data was being closely watched for any signs of weakening prices.15 Largely due to a rise in gasoline prices in the wake of Hurricane Harvey, the CPI rose 0.4% in August from the month earlier, against analyst expectations of a rise of 0.3%. Overall, headline prices rose 1.9% in the 12 months through August, up from 1.7% in July.14 While the Fed is likely to view the energy-driven rise in CPI as temporary, a pickup in monthly core CPI is likely to assuage concerns that inflation is continuing to decline. After four straight monthly increases of just 0.1%, core prices rose 0.2% in August and rose 1.7% over the preceding 12 months.14 This week’s CPI figure is the last inflation data the Fed will see before next week’s FOMC meeting when the central bank is largely expected to announce the beginning of balance sheet normalization, as well as providing investors with a fresh set of economic projections and its expectations for the path of interest rates going forward.16
Chart of the week: Investor sentiment near a multiyear high
- Investor optimism in the U.S. hit a 17-year high during the third quarter of 2017, according to the Wells Fargo/Gallup Investor and Retirement Optimism Index.17 The National Federation of Independent Businesses August 2017 Small Business Optimism Index reflected similar enthusiasm, moving up slightly in August from July and flirting once again with its approximately 12-year high, reached in January 2017.18
- Both indexes appear to reflect the strong equity performances we have seen this year – the S&P 500 Index reached another record high on Wednesday.1 Volatility measures also retreated this week, with the CBOE Volatility Index receding back to approximately 10, where it has generally resided since May 2017.5
- It is important to remember, however, that sentiment indexes typically reflect current, or recent, market activity more so than what investors might expect in the coming year or years.
- To this end, it appears that some of the drivers that helped push market returns in recent years may no longer be as supportive going forward. For example, the Fed continues to anticipate low economic growth (1.8%) and low inflation (2.0%) over the longer run, both of which could cap potential corporate earnings growth.19
1 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
2 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
3 The Wall Street Journal, http://on.wsj.com/2gYnoQz.
4 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
5 Federal Reserve Bank of St. Louis, http://bit.ly/295DSwP.
6 The Wall Street Journal, http://on.wsj.com/2y3uNRM.
7 Bank of America Merrill Lynch U.S. High Yield Master II Index.
8 Bank of America Merrill Lynch U.S. High Yield Master II Index (yield-to-worst).
9 S&P Leveraged Commentary & Data Weekly Wrap, September 14, 2017.
10 Credit Suisse Leveraged Loan Index.
11 Thomson Reuters Lipper.
12 Thomson Reuters LPC, http://bit.ly/2y3AIX2.
13 S&P Leveraged Commentary & Data, Loan Stats Weekly, September 14, 2017.
14 U.S. Bureau of Labor Statistics, http://bit.ly/2k22igk.
15 Reuters, http://reut.rs/2vKOsp3.
16 U.S. Federal Reserve, http://bit.ly/29y0IjN.
17 Gallup, http://bit.ly/2wsPm9a.
18 National Federation of Independent Businesses Small Business Optimism Index, http://bit.ly/Lg4Ndz.
19 U.S. Federal Reserve, http://bit.ly/2rhINV5.
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