Higher yields: No material impact for Investment Grade companies?
The rising cost of financing could be a headwind for companies, but investment grade (IG) companies appear to be "immune" for the next few years. Indeed, according to Bank of America, refinancing maturing debt at the current IG yield of 5.4% would reduce the coverage ratio to about 11.5x by the year 2026, which is still above the median. Source: Bank of America.
No refinancing pressure yet for US high yield companies!
One of the main factors supporting US high yield is technical. The U.S. high yield market is not facing an "avalanche" of new issuance because refinancing needs are very low for 2023. Therefore, the potential negative impact of rising interest rates should be limited for U.S. high yield companies for the time being. Source: Goldman Sachs
The market no longer expects a rate cut during the summer!
While the market has been anticipating the first Federal Reserve rate cut in the summer of 2023 for the past year, improving economic growth sentiment and a still strong job market have led the market to revise its expectations. Indeed, the spread between the SOFR 3-month June and September 2023 futures turned positive yesterday, reflecting the fact that no further rate cuts are expected by the market from June to September. Source: Bloomberg
Largest weekly outflow since 2020 in U.S. High Yield bonds!
Last week, one of the largest ETFs tracking U.S. high yield bonds, the HYG or iShares iBoxx HY Corporate Bond ETF, had its largest outflow since 2020. Valuations are stretched in high yield despite solide fundamentals. Any spike in equity volatility could quickly negatively impact this segment. Source: Bloomberg
A new cycle high for U.S. terminal rate expectation
The market has pushed its expectations for the U.S. terminal rate higher (and longer). Indeed, it now appears that it will end slightly above 5% and in July 2023 (one month later than previously expected). The resilience of the U.S. economy (driven by a strong labor market) continues to drive terminal rate expectations higher and for a longer period of time. Source: Bloomberg
The Itraxx Xover index below 400bps for the first time since April 2022!
The spread of the Markit iTraxx Xover index, which is a good indicator of investor sentiment on European high yield, fell below 400 basis points for the first time since April 2022. The index is tightening by 25 basis points today following Ms. Lagarde's reassuring comment on the growth outlook. Source: Bloomberg
Best January since 1975 for US Investment Grade bonds
U.S. investment grade (IG) bonds recorded their best January performance (+4%) since 1975! After having its worst year in 2022 (-15.8%), the IG bond market is recovering thanks to the slowing of the Federal Reserve's monetary policy tightening and a better than expected economic outlook. Source: Bloomberg
Fed fund rate above Core PCE for the first time since the pandemic!
For the first time since February 2020, Fed funds rates are positive in real terms as the Core PCE index came out at 4.4% (vs. 4.5% for the Fed funds rate). This bodes well for an imminent halt in rate hikes, unless the US economy surprises on the upside. Source: Bloomberg
