High yield bond prices slip amid modest outflows
Corporate credit prices declined this week as investors absorbed the first real setback for stocks since August, some moderate to heavy outflows, and the flattest yield curve in a decade.1,2,3 High yield bond prices slipped toward week’s end, despite receding rate concerns and a stronger backdrop for energy, as high yield bond mutual funds recorded a weekly outflow of $622 million for the week ended November 8.4,5,6 Following this week’s declines, high yield bonds are providing month-to-date returns of approximately -0.81%, which, if sustained, puts the asset class on track for its first monthly loss since August’s mild decline.4 A handful of sectors have come under pressure over the past week, with the consumer products (-1.3%), healthcare (-1.0%), telecommunications (-2.7%) and retail (-1.0%) sectors driving declines in the broader benchmark index.7,8,9,10 Conversely, high yield energy bonds experienced positive returns, generating a month-to-date gain of approximately 0.3%.11 Year to date, high yield bonds are generating returns of approximately 6.6%, with CCC rated bonds returning 8.8% and B and BB rated bonds returning 5.8% and 6.6%, respectively, in 2017.12,13,14
Senior secured loans tracking mild November declines
Senior secured loans followed high yield bonds lower this week, generating a modest decline on Thursday after trading sideways through most of the week.15 Month to date, senior secured loans are now providing a return of -0.05%, bringing year-to-date returns to approximately 3.66%.15 Bank loan mutual funds recorded an outflow of $1.5 billion for the week ended November 8, marking the largest weekly outflow from the asset class since December 2015.2 This marks the fourth straight weekly outflow for the asset class and 12th weekly outflow over the past 15 weeks.2 On an annual basis, however, demand for the asset class has remained solid. Bank loan mutual funds have recorded more than $15 billion in net inflows so far in 2017, and collateralized loan obligation (CLO) issuance, representing the largest buyers of senior secured loans, has exceeded $102 billion.2,16 Similar to high yield bonds, sector dispersion has increased to begin November, with retail (-0.31%) and consumer product (-0.85%) senior secured loans both generating month-to-date declines.17,18 Senior secured loan yields widened slightly this week to approximately 6.13%. 19 For perspective, high yield bond yields are currently sitting at approximately 5.81% after hitting a multi-year low of less than 5.4% the last week of October.20
Long-end Treasury yields drift lower as tax timeline extends
With few economic reports scheduled this week, bond investors shifted their attention to developments in Washington, DC, with focus squarely on U.S. tax reform.21 Bond investors appear to have grown more skeptical about the chances of passing tax cuts this year, which has helped boost long-end Treasury prices since the initial release of the Republican-led tax bill.22 Thursday, Senate Republicans unveiled a tax proposal that differs significantly from the House tax plan, highlighting the challenges of progressing the bill through Congress.23 After rising near 2.5% in late October, U.S. 10-year Treasury yields have since tightened to approximately 2.3% as the timeline to a potential rollout of tax cuts appears to have been extended.5 With investors pricing in a 97% chance of a December rate hike, however, 2-year U.S. Treasury yields have continued to climb.24,25 Against the backdrop of the flattest U.S. Treasury yield curve in a decade, next week’s U.S. consumer price index (CPI) data will be closely watched following last week’s disappointing inflation data and is likely the next logical catalyst for U.S. government bonds.3,26,27
Chart of the week: Yield curve signals a skeptical bond market
- Stock and bond investors appear to have very different views of future market and economic landscapes. For example, the U.S. stock market’s year-to-date returns of nearly 20% appear to be largely driven by investors’ expectations of expedited economic growth and improvements in corporate profits in coming years.1 Meanwhile, the U.S. Treasury yield curve this week reached its flattest level in more than a decade because yields on the long end of the curve have declined notably from their 2017 peak.3
- Specifically, the yield on the 2-year U.S. Treasury note has risen fairly steadily in 2017 as it has largely reacted to Federal Reserve action. The Fed has hiked interest rates twice already this year and appears on track to raise rates again at its December meeting. Yields on the 2-year U.S. Treasury note have climbed 16 basis points since the beginning of October and approximately 43 basis points year to date.25
- Meanwhile, the yield on the 10-year U.S. Treasury note reached its 2017 high of 2.62% in March. More often this year, however, it has remained within the tight 2.2%–2.5% range and year to date has declined approximately 6 basis points.5
- While bond investors have clearly reacted to shorter-term market drivers – Fed rate hikes, for example – they appear to harbor continued skepticism that inflation, or economic growth, will pick up meaningfully over the medium term.
1 Federal Reserve Bank of St. Louis, S&P 500 Index, http://bit.ly/2d3pN5b.
2 Thomson Reuters Lipper.
3 Federal Reserve Bank of St. Louis, 10-year minus 2-year Treasury, http://bit.ly/2oMWaP2.
4 ICE Bank of America Merrill Lynch U.S. High Yield Master II Index.
5 Federal Reserve Bank of St. Louis, 10-year Treasury constant maturity rate, http://bit.ly/29ecBfp.
6 Federal Reserve Bank of St. Louis, WTI, http://bit.ly/292Tgue.
7 ICE Bank of America Merrill Lynch U.S. High Yield Consumer Products Index.
8 ICE Bank of America Merrill Lynch U.S. High Yield Healthcare Index.
9 ICE Bank of America Merrill Lynch U.S. High Yield Telecommunications Index.
10 ICE Bank of America Merrill Lynch U.S. High Yield Super Retail Index.
11 ICE Bank of America Merrill Lynch U.S. High Yield Energy Index.
12 ICE Bank of America Merrill Lynch U.S. High Yield CCC & Lower Rated Index.
13 ICE Bank of America Merrill Lynch U.S. High Yield B Rated Index.
14 ICE Bank of America Merrill Lynch U.S. High Yield BB Rated Index.
15 Credit Suisse Leveraged Loan Index.
16 S&P Global Market Intelligence, Leveraged Commentary and Data, as of November 9, 2017.
17 Credit Suisse Leveraged Loan Index (retail component).
18 Credit Suisse Leveraged Loan Index (consumer non-durables component).
19 Credit Suisse Leveraged Loan Index (yield to a three-year takeout).
20 ICE Bank of America Merrill Lynch U.S. High Yield Index (yield-to-worst).
21 The Wall Street Journal, http://on.wsj.com/2hZD9V4.
22 The Wall Street Journal, http://on.wsj.com/2i0YUUB.
23 Reuters, http://reut.rs/2zwvy8a.
24 Bloomberg, based CME data.
25 Federal Reserve Bank of St. Louis, 2-year Treasury constant maturity rate, http://bit.ly/2anGvQ0.
26 Bureau of Labor Statistics, http://bit.ly/2zsgHhp.
27 Bureau of Economic Analysis, http://bit.ly/1cR0IcA.
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