Oct 2, 2017 - High yield corporate bonds have a total return of 7.00% year-to- date and 8.88% ... Bond prices will fall
October 2, 2017 |
Fixed Income Strategy
Corporate Bond Commentary
Corporate Bond Market Comments
A hawkish Janet Yellen, the concern over the impact of the Fed’s downsizing of its balance sheet and President Trump’s administration’s release of their tax reform plan (albeit somewhat short on details) sent Treasury yields higher despite inflation continuing to trend down (the core PCE report release showed that it fell to 1.3% in August from 1.4% in July). Credit spreads continue tightening as the first glance at the tax reform act appears to be beneficial to corporations with the corporate tax rate being lowered to 20% from the current 35%, allowance for the immediate expensing of capital expenditures (still some defining to be done on this matter), and the chance that there will be some level of interest deductibility on corporate debt. However, tax reform is complex and there will likely be changes made to the original plan as it progresses through Congress. High yield issuance in September was $35 billion bringing the year-to-date total to almost $210 billion. This is an increase of 16% over the first nine months of last year. Investment-grade issuance in September was $113.5 billion which was below the September 2016 total of $132 billion. Investment-grade corporate bonds yields ended last week at 3.16% while the spread level over comparable Treasury yields was 101 bps. The IG yield level began the year at 3.39% resulting in yields falling 23 bps this year while spread levels were 122 bps over at the onset of 2017 resulting in spread tightening of 21 bps this year. Investment-grade corporate bonds have a year-to-date total return of 5.19% and 2.21% over the past 12-months. Investment-Grade Corporate Bond Total Return and Statistical Data – 9/29/17 YTD 5.19% 6.06% 3.91% 4.74% 5.77%
Yield 3.16% 2.91% 2.61% 2.93% 3.45%
Spread 101 57 59 80 128
Price $105.84 $104.71 $104.38 $106.37 $105.75
Coupon 3.99% 3.28% 3.13% 3.78% 4.35%
Mat 10.97 17.29 9.48 10.79 11.13
Duration 7.55 10.68 6.73 7.60 7.54
Convexity 1.09 2.15 0.97 1.12 1.05
Industrial 2.06% 5.35% Utility 1.17% 5.60% Financial 2.79% 4.79% Source: Bloomberg Barclay’s Indices
3.24% 3.34% 2.94%
105 100 93
$106.01 $108.81 $104.88
4.07% 4.35% 3.74%
12.03 15.12 7.96
8.06 9.99 6.01
1.23 1.73 0.68
IG Corporates Aaa Aa A Baa
TR-12 2.21% 0.86% 0.79% 1.48% 3.15%
Preferred securities have a year-to-date total return of 10.10% and a trailing-12 month total return of 5.89%, according to data from Bank of America Merrill Lynch Indices. Leveraged loans have a total return this year of 3.06% and a trailing-12 month total return of 5.46%, according to the same indices. High yield spreads ended the week at 347 bps over comparable Treasury yields while the yield level was 5.45%. High yield spreads began the year at 398 bps over which has resulted in tightening of 51 bps year-to-date while yields have fallen from 6.01% at the onset of 2017 resulting in yields down 56 bps. High yield corporate bonds have a total return of 7.00% year-todate and 8.88% over the trailing 12-months, according to data from the Bloomberg Barclay’s Indices.
B. Craig Elder, Director Fixed Income Senior Analyst
[email protected] 312-609-5433
October 2, 2017 | Fixed Income
High Yield Ba B Caa Ca-D Ba/B
High Yield Corporate Bond Total Return and Statistical Data – 9/29/17 TR-12 YTD Yield Spread Price Coupon Mat Dur 8.88% 7.00% 5.45% 347 $101.86 6.43% 6.27 3.78 7.36% 6.90% 4.03% 206 $105.31 5.63% 6.91 4.36 8.24% 6.11% 5.33% 340 $102.44 6.65% 6.05 3.42 14.40% 9.26% 8.47% 647 $95.28 7.79% 5.13 3.11 26.57% 12.85% 25.04% 1,987 $63.94 8.62% 3.55 2.76 7.74% 6.52% 4.65% 269 $103.94 6.12% 6.50 3.91
Industrials 8.80% 7.00% Energy 11.78% 5.63% Retailers 0.97% 1.52% Utilities 8.35% 9.15% Financial 9.89% 8.16% Source: Bloomberg Barclay’s Indices
5.45% 6.47% 7.79% 5.52% 4.59%
347 439 560 344 265
$101.86 $98.22 $93.24 $101.78 $105.38
6.43% 6.48% 6.49% 6.52% 6.15%
6.27 6.48 6.71 6.51 5.90
3.78 4.23 3.73 3.82 4.08
Con (0.30) (0.10) (0.55) (0.26) 0.07 (0.31) (0.30) (0.13) (0.10) (0.51) (0.05)
Moody’s LSI Moody’s Liquidity Strength Index (LSI) fell during the first half of September dropping to 3.2% from the 3.4% level seen at the end of August as the LSI has fallen since March 2016 (with the exception of January and August of this year). The LSI is nearing its all-time low of 2.8% experienced in April 2013 as earnings growth and capital market access strengthens the liquidity profiles of high yield issuers. Concerns remain over geopolitical tensions, major natural disasters, lack of legislative progress, and central bank tightening have not resulted in spread widening, an upsurge in LSI, or an increase in default rates of corporate debt as yet. Moody’s is forecasting that the U.S. speculative-grade default rate will fall to 2.7% by August 2018 from the current level of 3.4%. Sources: Bloomberg: Bond News Bloomberg Barclay’s Indices CreditSights: Monday Morning Meeting Notes: Return of the Reflation Trade. October 2, 2017. Moody’s: SGL Monitor. September 19, 2017.
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Appendix – Important Disclosures Some of the potential risks associated with fixed income investments include call risk, reinvestment risk, default risk and inflation risk. Additionally, it is important that an investor is familiar with the inverse relationship between a bond’s price and its yield. Bond prices will fall as interest rates rise and vice versa. When considering a potential investment, investors should compare the credit qualities of available bond issues before they invest. The two most recognized rating agencies that assign credit ratings to bond issuers are Moody's Investors Service (“Moody’s”) and Standard & Poor's Corporation (“S&P”). Moody’s lowest investment-grade rating for a bond is Baa3 and S&P’s lowest investment-grade rating for a bond is BBB-. Ratings are measured on a scale that ranges from AAA or Aaa (highest) to D or C (lowest). This is not a complete analysis of every material fact regarding any sector, municipality or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. It is strongly recommended that an investor discuss with their financial professional all materially important information such as risks, ratings and tax implications prior to making an investment. Past performance is not a guarantee of future results. This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report. ADDITIONAL INFORMATION ON SECURITIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST BY CONTACTING YOUR BAIRD INVESTMENT PROFESSIONAL. Copyright 2017 Robert W. Baird & Co. Incorporated.
