Senior portfolio manager Tim Leary discusses how weaker job growth and strong bond market activity, coupled with tight spreads, support expectations for a September rate cut and continued favorable conditions for fixed-income markets.
Weaker job data and key events like Jackson Hole and August payrolls pave the way for a September rate cut.
Strong technicals in the US bond markets persist, with significant issuance and demand driving tighter spreads, lower yields, and favorable pricing.
The S&P showed minor volatility, while the Russell 2000 demonstrated stronger risk sentiment, reflecting optimism in HY markets due to overlapping names.
This leads us to prefer fixed coupons over variable in fixed income credit markets.
Transcripts
Hello & welcome back to the Weekly Fix, my name is Tim Leary & I’m a Senior Portfolio Manager on RBC’s BlueBay Leveraged Finance Team in Stamford, Connecticut.
Last Friday we saw weaker but still positive job growth & the fix is now in for a rate cut in September with more to follow in the months to come. It’s possible we see a tick up in inflation later this week with PMI (Purchasing Managers’ Index) & CPI (Consumer Price Index) data out Tuesday and Wednesday, but the reality is, we now have Jackson Hole and August payrolls behind us, so the coast is clear to cut.
This will be music to the ears of many, especially bankers on the phone with HY & IG issuers this month on their go-no-go calls for bond deal launches. Last week saw 35bln of IG supply and 13 HY deals priced for just under ~10b in the states alone. This week should likely be similar.
Nevertheless, the technicals remain firm. US HY bond issuers will either pay out or pay back about 23bln of cash to investors this month via coupon payments, bond calls or maturities coming due. It’s no wonder that every deal last week priced inside of initial price whisper and still traded up on the break. Remember, unlike leveraged loan markets, bonds tend to trade up when interest rates go down. While we still see value in safe carry in the loan market, and the CLO (Collateralized Loan Obligations) bid remains relentless, the upside price convexity in HY stands out compared to its floating rate sibling. In equities, the S&P wobbled a bit post NFP (nonfarm payrolls), but pullbacks seem to be met with demand. Risk sentiment in the Russell 2k fared better, even after its 6.1% return in August, and that’s probably the best gauge for US HY considering the overlap of names & the lack of big tech in the HY benchmark. So, in closing, yes spreads are tight, but they’re probably going tighter, and so are yields. That’s why we still like the fixed coupons in fixed income credit markets. It’s got forgiving carry & HY will benefit from steepening treasury curves….it is only a 3yr duration product after all.
