Corporate credit prices rally into November’s end
Corporate credit prices rallied toward month’s end amid fresh records for U.S. equities, a stronger backdrop for energy and solid economic data.1,2,3 High yield bonds posted gains in nine of the last 11 trading sessions of November, recouping almost all of the declines experienced during the first two weeks of the month.4 Despite this, high yield bonds registered a modest 0.27% decline, which was the worst monthly performance for the asset class since November 2016.4 Notable underperformers during November included the consumer products (-1.54%) and telecommunications (-2.23%) sectors.5,6 High yield bonds are now providing a year-to-date gain of approximately 6.96%, with CCC rated bonds returning approximately 9.62% so far in 2017 as investors have continued to move down the capital structure in search of higher-yielding investments.4,5 Senior secured loans also firmed toward month’s end, posting gains in each of the last 10 trading sessions to end November in positive territory. Following November’s 0.12% gain, senior secured loans have now provided positive returns in 19 of the past 21 months.8 Year to date, senior secured loans are returning approximately 3.85%, with all industries excluding the retail sector providing a positive return.8,9
Energy credit rises on firmer oil prices
Oil prices were once again in focus this week as OPEC and Russia agreed to extend a deal struck in 2016 to curb output through the end of 2018.10 Given that the deal was widely anticipated, oil prices moved only slightly higher immediately following the agreement.2 However, at more than $58 a barrel, oil prices are now sitting at their highest levels in over two years, having posted their longest streak of monthly gains since early 2016.2 Ahead of the deal to extend production cuts, several banks raised their oil price forecasts and the U.S. Energy Information Administration reported a larger-than-expected 3.4 million-barrel decline in oil inventories.11,12 Against a firmer backdrop for energy, high yield energy bonds and senior secured energy loans both ended November in positive territory.13,14 Year to date, high yield energy bonds and senior secured energy loans are now providing gains of approximately 6.74% and 4.86%, respectively.13,14 For context, the S&P 500 Energy Index and the Alerian MLP Index returned -5.62% and -10.75%, respectively, through the same period.15,16
Treasury curve flattens amid muted inflation
This week’s busy economic calendar included Federal Reserve Governor Jerome Powell’s confirmation hearing, revised third-quarter GDP, fresh inflation data and a Senate vote on the Republican-led tax bill.17,18,19,20 Helped by strong economic data and increased chances of passing tax cuts this year, long-end Treasury yields rose during the week, but remained tethered by benign inflation data.21 This week saw a measure of U.S. consumer confidence rising to a 17-year high, third quarter GDP upwardly revised to 3.3% and personal spending and personal incomes rising by 0.3% and 0.4%, respectively, in October.18,19,22 While economic growth remained solid, inflation pressures remain muted, with personal consumption expenditures (PCE) and core PCE rising just 1.6% and 1.4%, respectively, in the 12 months through October.19 With Fed officials continuing to signal a December rate hike, U.S. 2-year Treasury yields continued to climb, and the U.S. Treasury yield curve continued to flatten.23,24 At approximately 59 basis points, the yield differential between the U.S. 2-year and 10-year Treasury notes declined to a new 10-year low.25 Looking ahead, November’s nonfarm payrolls report will be the highlight of next week’s calendar while the U.S. Federal Reserve’s December 12–13 meeting will provide a fresh set of economic projections and its outlook for interest rates heading into 2018.26,27
Chart of the week: No longer transitory? The Fed’s changing tone on inflation
- While many investors have been focused on the potential implications of the upcoming change in leadership at the U.S. Federal Reserve, Fed policymakers have already made some notable changes recently in the way they have been talking about inflation.
- For example, observers may have grown accustomed to Fed officials’ view that soft inflation figures are due to “idiosyncratic or one-time factors,” which policymakers highlighted as recently as September’s FOMC meeting.28 On numerous occasions, too, Fed Chair Yellen has cited falling prices for cellphone plans as an example of one factor that has kept a lid on prices.
- Yellen’s tone shifted notably, however, at an appearance at New York University’s Stern School of Business on the Tuesday before Thanksgiving. Yellen said she is no longer “certain that [low inflation data] is transitory,” adding that it could be a result of “something more endemic or long-lasting.”29
- The minutes of the Fed’s October-November meeting released one day later reflect a similar change in the narrative. Many participants at the meeting observed that low inflation readings may be reflective of one-time factors, but also “could prove more persistent.”30
- This shift in tone comes amid further evidence of muted inflation. Data released this week showed that both the PCE index and core PCE index remained anchored well below the Fed’s preferred 2.0% mark.19 Core PCE has been stuck below 2.0% since April 2012 while the broader PCE index, which reflects volatile movements in energy prices, briefly rose above 2% in early 2017 before falling once again.19
1 Federal Reserve Bank of St. Louis, S&P 500, http://bit.ly/2d3pN5b.
2 Federal Reserve Bank of St. Louis, WTI, http://bit.ly/292Tgue.
3 Federal Reserve Bank of St. Louis, GDP, http://bit.ly/2jAzH3p.
4 ICE Bank of America Merrill Lynch U.S. High Yield Master II Index.
5 ICE Bank of America Merrill Lynch U.S. High Yield Consumer Products Index.
6 ICE Bank of America Merrill Lynch U.S. High Yield Telecommunications Index.
7 ICE Bank of America Merrill Lynch U.S. High Yield CCC & Lower Rated Index.
8 Credit Suisse Leveraged Loan Index.
9 Credit Suisse Leveraged Loan Index (retail component).
10 Reuters, http://reut.rs/2itkdlc.
11 The Wall Street Journal, http://on.wsj.com/2jvnnkN.
12 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
13 ICE Bank of America Merrill Lynch U.S. High Yield Energy Index.
14 Credit Suisse Leveraged Loan Index (energy component).
15 S&P Dow Jones Indices, http://bit.ly/2ydsLD0.
16 Alerian, http://bit.ly/2yKWiRz.
17 U.S. Federal Reserve, http://bit.ly/2kb4DuO.
18 Bureau of Economic Analysis, GDP, http://bit.ly/1DqcVBJ.
19 Bureau of Economic Analysis, PCE, http://bit.ly/2mOhSP0.
20 The Wall Street Journal, http://on.wsj.com/2j7FnlP.
21 Federal Reserve Bank of St. Louis, 10-year Treasury, http://bit.ly/29ecBfp.
22 The Conference Board, http://bit.ly/1eu7yyH.
23 Bloomberg, https://bloom.bg/2Antqjn.
24 Federal Reserve Bank of St. Louis, 2-year Treasury, http://bit.ly/2anGvQ0.
25 Federal Reserve Bank of St. Louis, 10-year/2-year Treasury spread, http://bit.ly/2oMWaP2.
26 Econoday, http://bit.ly/1iJOdAP.
27 U.S. Federal Reserve, http://bit.ly/29y0IjN.
28 Federal Reserve September 2017 minutes, http://bit.ly/2wOKgoX.
29 The Wall Street Journal, http://on.wsj.com/2B1qwjw.
30 Federal Reserve October-November 2017 minutes, http://bit.ly/2hVcZ95.
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