High yield bonds see modest declines amid outflows
Corporate credit prices were mixed this week as investors absorbed a steady climb in U.S. Treasury yields, outflows from high yield bond mutual funds and another record high for U.S. equities.1,2,3 High yield bonds posted a modest decline of -0.04% during the week ended January 18, the first weekly decline since early November.4 High yield bond mutual funds reported outflows of approximately $3.1 billion, the second-largest weekly outflow of the past 10 months, following a sizeable inflow last week.2 In all, high yield bond mutual funds have experienced net outflows of $424 million so far in 2018 as the rise in U.S. Treasury yields has redirected some investor attention to the potential impact of rising interest rates to fixed income investments.2 High yield bonds are now providing a month-to-date gain of approximately 0.67%.4 Alongside a decline in prices this week, high yield bond yields widened slightly to 5.73%, up from a multi-year low of 5.37% in late October.5
Senior secured loans rise in latest week
Conversely, senior secured loans posted gains this week, possibly benefiting from the asset class’s floating rate coupon and position as a potential hedge against the adverse effects of a rise in rates.6 Senior secured loans returned approximately 0.19% during the week ended January 18 and are now providing a month-to-date gain of 0.59%.6 Recall, senior secured loans are now tracking positive returns in 20 of the past 22 months.6 Bank loan mutual funds continued to record modest weekly outflows and have now experienced net outflows of $60 million in January.2 This comes on the heels of the nearly $12.5 billion of inflows into bank loan mutual funds last year and the nearly $120 billion in collateralized loan obligations, the largest buyers of senior secured loans, issued in 2017.2,7 Amid the recent rise in U.S. Treasury yields, other fixed income investments are largely tracking negative performance in January.1 For example, investment-grade corporate bonds are now providing month-to-date returns of approximately -0.71%, while U.S. 2-year and 10-year government bonds are returning -0.20% and -1.61%, respectively.8,9,10
U.S. Treasury yields rise across the curve on growing optimism
U.S. government bond yields resumed their steady march upward this week as rising global growth expectations, a mildly firmer picture of inflation and mounting expectations around interest rate hikes in 2018 sent the U.S. 10-year Treasury yield higher.11 Rising above 2.60% this week for the first time since last March, the U.S. 10-year Treasury yield still remains low by historical measures.1 Meanwhile, the U.S. 2-year Treasury yield settled above 2.0% for the first time since 2008, spurred by growing investor expectations that the U.S. Federal Reserve will move to raise interest rates three times in 2018.12 Federal Reserve Bank of Dallas President Robert Kaplan said this week that he expects the U.S. central bank to raise rates at least three times this year.13 “I feel strongly and I have a lot of conviction that the base case should be three moves for this year, and if I’m wrong, it could even potentially be more than that,” he said.13 Further weighing on Treasury prices was an upbeat view of the U.S. economy provided by the Fed’s Beige Book, another decline in U.S. weekly jobless claims and a higher-than-expected rate of China’s expansion.14,15,16 Following this week’s light economic calendar, next week will include a fresh look at durable goods orders and a first look at fourth quarter U.S. GDP.17
Chart of the week: DJIA has soared, but challenges remain
- U.S. stock indexes reached new highs again this week, with the Dow Jones Industrial Average climbing above 26,000 before experiencing some selling pressure later in the week. The index’s recent thousand-point climb from 25,000 to 26,000 was, by far, its fastest ever, outpacing its second-fastest such rise by more than two weeks.18
- Investors have enthusiastically helped propel stock prices higher, with stock funds worldwide seeing their sixth-largest weekly inflow ever in mid-January.19 For its part, the financial press has described recent market activity as a “melt-up rally” and noted that the “few remaining bears are finally giving up.”19,20
- While investors remain enthusiastic about the economy and the equity markets, it’s important to remember that certain investment challenges remain in place.
- For one, finding income continues to be difficult. The yield on the 10-year U.S. Treasury note was approximately 2.64% on Friday.1 This week it rose slightly above the band inside which it has traded since early 2017, yet it’s still very low relative to its post-crisis high of 3.98% in April 2010.1 Meanwhile, yields on investment grade bonds sit at approximately just 3.4%.21
- Additionally, the recent run within the equity markets has come amid historically low levels of volatility. While no one knows what the future holds for stock market performance, investors might be wise to watch market conditions should volatility once again enter the markets from such potential sources as Fed policy, consumer demand and employment trends.
1 Federal Reserve Bank of St. Louis, 10-year yield, http://bit.ly/29ecBfp.
2 Thomson Reuters Lipper.
3 Federal Reserve Bank of St. Louis, DJIA, http://bit.ly/2jZjDYt.
4 ICE BofAML U.S. High Yield Master II Index.
5 ICE BofAML U.S. High Yield Master II Index (yield-to-worst).
6 Credit Suisse Leveraged Loan Index.
7 S&P Global Market Intelligence, Leveraged Commentary & Data.
8 ICE BofAML U.S. Corporate Master Index.
9 ICE BofAML U.S. 2-year Treasury Index.
10 ICE BofAML U.S. 10-year Treasury Index.
11 Reuters, http://reut.rs/2rsqSjp.
12 Federal Reserve Bank of St. Louis, 2-year yield, http://bit.ly/2anGvQ0.
13 The Wall Street Journal, http://on.wsj.com/2FNNspx.
14 U.S. Federal Reserve, Beige Book, http://bit.ly/2DjsZHw.
15 U.S. Department of Labor, http://bit.ly/298eR69.
16 BBC, http://bbc.in/2rltnno.
17 Econoday, http://bit.ly/1iJOdAP.
18 The Wall Street Journal, http://on.wsj.com/2Dm2qFI.
19 Bloomberg, https://bloom.bg/2Bd2f9Z.
20 The Wall Street Journal, http://on.wsj.com/2DqmiXp.
21 ICE BofAML U.S. Corporate Master Index (yield-to-worst).
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