Date: June 29, 2018
Beaten-Up U.S. Corporate Debt Is Enticing Few Bargain Hunters
Blue-chip corporate bonds are on track to be the worst-performing U.S. asset class this year, and money managers caution that it may be too soon to start looking for bargains. The strong economy is triggering fears of rising inflation and unexpectedly fast Federal Reserve rate hikes, which have weighed on both U.S. Treasuries and investment-grade corporate bonds. On top of that, American companies are borrowing more and their interest costs are rising relative to their income. It’s not clear how much longer the pain will persist for investment-grade bonds. Issuance is likely to slow down in the second half of the year, cutting into supply, and foreign buyers may be more inclined to buy now as the U.S. dollar appreciates. That makes it tricky to figure out when to snatch up the securities, said Brian Kennedy, a portfolio manager at Loomis, Sayles & Co. “There’s certainly more value today than there was six months ago — that’s indisputable,” Kennedy said. “But investment-grade debt is still not giving you enough yield to totally offset rate hikes at this point.” Investment-grade corporate debt has fallen 3.2 percent this year through June 27 on a total-return basis, on track for the worst first half of a year since 2013, according to Bloomberg Barclays index data. The notes have lagged Treasuries and mortgage bonds, while junk bonds have eked out gains. “It’s been a challenging year,” said Matt Brill, a senior portfolio manager at Invesco Ltd., which managed $237 billion of fixed income assets as of April 30. While high-yield debt is still performing well, “In investment-grade, you have all sorts of problems.” Overall corporate profits rose nearly 25 percent in the first quarter thanks in large part to tax cuts, according to data compiled by Bloomberg. But that’s not necessarily trickling down to debt investors, according to Morgan Stanley. Blue-chip U.S. companies’ median gross leverage, or debt relative to earnings before interest, taxes, depreciation and amortization, edged higher in the first quarter to 2.5 times, the second-highest level on record, Morgan Stanley strategists led by Adam Richmond wrote in a report this month.
Euro-Area Inflation Hits 2% Level Amid Boost From Oil Prices
Euro-area inflation hit the 2 percent level in June for the first time in more than a year, supported by higher oil prices. The pickup in rate of price growth to just above the European Central Bank’s target was in line with the median estimate of economists surveyed by Bloomberg. The core measure, which excludes volatile components such as food and energy slowed to 1 percent, while services inflation cooled to 1.3 percent. While the acceleration will be welcomed by the ECB — inflation was just 1.3 percent at the start of the year — policy makers are really looking for a solid pickup that won’t require monetary support. They have expressed confidence that inflation is converging sustainably toward their goal of just under 2 percent and plan to wind down the ECB’s bond-buying program at the end of this year. Much of the ECB’s confidence is linked to employment, which has benefited from continued economic growth. “Domestic cost pressures are strengthening amid high levels of capacity utilization, tightening labor markets and rising wages,” ECB President Mario Draghi said this month.
What Analysts Say About Bank Indonesia’s Rate Increase Surprise
Bank Indonesia’s decision to raise benchmark rates more than expected underscored its determination to stabilize the market, analysts said, though they remained cautious over the outlook given the global trade row and the Federal Reserve’s tightening stance. The central bank lifted the seven-day reverse repurchase rate by 50 basis points to 5.25 percent on Friday, marking a third hike in six weeks. Of the 31 economists surveyed by Bloomberg, 24 predicted a 25 basis-point hike and the rest forecast no change.The rupiah strengthened as much as 0.6 percent against the dollar immediately after the decision, and closed up 0.4 percent at 14,330. The benchmark Jakarta Composite Index jumped 2.3 percent. The nation’s 10-year bond yield dropped for the first day in seven, slipping 9 basis points to 7.81 percent. Joey Cuyegkeng, an economist at ING Groep NV in Manila: A surprise 50 basis-point hike would help and would communicate to the market its readiness to be aggressive in stabilizing the markets and protecting the financial system ING recently revised end-2018 rupiah forecast to to 14,320 per dollar from prior estimate of 13,890.