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Fixed Income

High Yield Bond Update: A Q&A with Seth Meyer


In this interview, Portfolio Manager Seth Meyer, CFA, discusses some of the factors that are influencing the U.S. high-yield market.
 

Q: How late-cycle is the U.S., and how does this impact your view of credit quality?

Seth Meyer: Since the Second World War, the average economic expansion in the U.S. has lasted around 60 months. The current expansion has already lasted 96 months, leading us to believe we are much closer to the end of the business cycle.

Age of post-WWII economic expansion in the U.S. (months)

https://blog.janushenderson.com/wp-content/uploads/2017/06/sm-chart-06.22.17.jpg

As we conduct our fundamental, bottom-up credit research, we emphasize two key things: management teams focused on deleveraging and companies with free-cash-flow generative business models. When valuations get tight and we are near the end of the credit cycle, we are looking for stability of free-cash- flow generation. Our approach to quality is less about emphasizing higher-rated high-yield securities, and more about identifying what we believe to be higher quality business models. In this environment, we typically find names in less cyclical sectors to be attractive.

Q: Has faith begun to fade in an extended economic and credit cycle under President Trump?

SM: In our view, the most accretive economic event that President Trump could carry out is corporate and personal tax reform. However, the hurdle is clearly higher now than it was in November 2016, and the administration’s inability to-date to execute on the repeal and replacement of the Affordable Care Act creates doubt about Trump’s ability to accomplish any reform legislation, whether in health care, taxes or infrastructure spending. That said, Trump has more cross-aisle support in Congress for tax reform than he does for health care reform. We believe that if the administration can accomplish tax

reform, particularly corporate tax reform, the cycle can be extended. Failure to execute even a watered- down version of tax reform would likely cause investors to lose faith in the administration’s ability to extend the cycle.

Despite distractions and the administration’s lack of accomplishments thus far, the insatiable demand for yield, in combination with positive gross domestic product (GDP) and employment growth, relatively strong company fundamentals and the potential for tax reform, creates ongoing investor interest in high yield. Spreads will likely widen if we see recessionary pressures or a turn in GDP, but we see markets expressing extreme complacency that such an event will not happen right now.

Q: Although high yield is less sensitive to rate risk than investment-grade credit, does monetary tightening by the Federal Reserve (Fed) pose any risks?

SM: Fed tightening puts the most pressure on the front end of the yield curve. However, it typically leads to volatility in longer duration assets (including the five-year part of the curve, which high yield is most exposed to) and the most interest rate sensitive sectors. As you look lower down the ratings quality spectrum, issuers will be less correlated to a rate hike. With BB-rated bonds (nearly 50% of the high-yield market as represented by the Bloomberg Barclays U.S. Corporate High Yield Bond Index) the most correlated to moves in interest rates, we expect a component of interest rate sensitivity as the Fed tightens but not to the same degree as we would see in investment grade.

Q: Does the Fed’s tightening raise your interest in financials?

SM: The most recent tightening does not raise our interest in financials, as financials tend to perform well with a steeper yield curve. At the moment, the dampened outlook for growth and inflation is leading to a flatter curve, creating an unfavorable environment for financials. If, however, the Trump administration manages to successfully implement growth-enhancing reforms, the back end of the curve is likely to sell off, and then we would find financials attractive. In such an instance, the Fed would be behind the curve. It would take them a lengthy period of time to catch up, so we would expect financials then to benefit from a steeper curve for some time.

Q: Do any sectors look more attractive or less attractive, and why?

SM: We are looking for companies with stable free-cash-flow profiles. Cable communications and food and beverage issuers are attractive at this juncture, as are health care issuers, specifically hospitals. The societal need for hospital services leads to these asset-rich entities being strong risk-adjusted opportunities, in our view. Some are selling assets; others are diversifying business models out of the pure acute care hospital and into higher margin businesses such as ambulatory surgery centers.

Furthermore, most U.S. hospital issuers have opted to conserve capital and pay down debt as they consider the implications of still-undecided health care reforms.

We are less focused on retailers, including fast fashion and most department stores, that are facing challenges as consumers shift their shopping online.

 

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the US dollar-denominated, high yield, fixed- rate corporate bond market.

Bond ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest)

This article is from Janus Henderson Investors and is being posted with Janus Henderson Investors’ permission. The views expressed in this article are solely those of the author and/or Janus Henderson Investors and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 

 

13612




Options

Volatility 411


CBOETV - Kevin Davitt, Senior Instructor, CBOE Options Institute, discusses the healthcare bill, oil and VIX futures.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, or at www.theocc.com. The information in this program is provided solely for general education and information purposes. No statement within the program should be construed as a recommendation to buy or sell a security or to provide investment advice. The opinions expressed in this program are solely the opinions of the participants, and do not necessarily reflect the opinions of CBOE or any of its subsidiaries or affiliates. You agree that under no circumstances will CBOE or its affiliates, or their respective directors, officers, trading permit holders, employees, and agents, be liable for any loss or damage caused by your reliance on information obtained from the program.

Copyright © 2016 Chicago Board Options Exchange, Incorporated.   All rights reserved.

This video is from CBOE and is being posted with CBOE’s permission. The views expressed in this article are solely those of the author and/or CBOE and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


13611




Stocks

Nasdaq Technical Take: Breaking down BCOM


Yesterday crude oil made fresh lows for 2017 and its YTD performance is now a negative (19.8%).  It is weighing on the broader commodity class and related tracking instruments as crude makes up ~12% of the Bloomberg commodity index (BCOM).  After five straight down years from 2011 to 2015 with average annual declines of (13.5%), the BCOM index appeared to be emerging from a vicious bear market in 2016 when it rebounded 11.4%.

However, 2016 is looking more like a bear market rally as this year’s rout in oil, along with a range of other commodities like natural gas, soybeans, sugar, corn and coffee, have driven the BCOM index to a YTD decline of (8.9%).  Last week the BCOM broke a nine-month support level at 82 and this week is seeing downside follow-through.  MTD it is down (3.7) for its worst monthly decline since July 2016.  The weekly RSI is making 15-month lows at the current 33 level, while the next the next obvious support level is down another 3.8% at 77.  This year’s deflationary price action is occurring as the Federal Reserve just raised the overnight lending rate three times in six months, along with recent projections to taper the balance sheet and another rate hike in the second half of 2017.  Barring a turnaround in crude and the broader commodity complex, one has to wonder whether or not the Fed will need to taper its own forecasts.          

Nasdaq's Market Intelligence Desk (MID) Team includes: 

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

This article is from Nasdaq and is being posted with Nasdaq’s permission. The views expressed in this article are solely those of the author and/or Nasdaq and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


13610




Stocks

Nasdaq Market Intelligence Desk - Equity Market Insight June 22, 2017


As of 12:30PM:

  • NASDAQ Composite +0.13% Dow +0.11% S&P 500 +0.1% Russell 2000 +0.4%
  • NASDAQ Advancers: 1354 / Decliners: 845
  • Today’s Volume (100day avg): +21%

US stocks are mixed this morning, while Biotechs (+1.3%) continue their recent surge. Yesterday’s EIA report initially gave Oil prices a boost, but a late day sell-off put the price per barrel at its lowest level since November. Gold is higher for the 2nd straight day, a streak the precious metal hasn’t posted in 2 weeks.

  • The low volatility and high call skew (implied volatility vs out of the money calls) in Gold has set up for an attractive opportunity in SPDR Gold (GLD) Call Spreads according to derivative strategist Chris Jacobsen from Susquehanna. An investor would be expecting to see moderate rise in GLD’s price for the trade to pay off.
  • The Nasdaq Biotech Index is tracking towards its best week since November, widely outpacing the rest of the Healthcare space. Insurers are getting a boost this morning after the Senate’s healthcare proposal was revealed. Republican’s plan will add $50 billion over the next four year to healthcare exchanges, as the cash injection is a “stabilization” effort. The vote will be brought to the floor next week.
  • Tomorrow will be the 1 year anniversary of Brexit with the UK seeing their currency fall 15% vs the US Dollar over the past year. The BOE recently made some surprising statements on possibly raising rates to support the British Pound, while curbing inflation. Nomura analysts believes the BOE will speed-up hike efforts and raise rates at the August meeting. The firm originally expected the next hike in mid 2019, but “With the bank growing increasingly intolerant of above-target inflation, it has begun to feel that weaker data would now be needed to prove the case for keeping policy on hold”, they stated in a report today. 

Nasdaq's Market Intelligence Desk (MID) Team includes: 

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

This article is from Nasdaq and is being posted with Nasdaq’s permission. The views expressed in this article are solely those of the author and/or Nasdaq and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 

13609




Technical Analysis

S&P500 (ES) Forming 3rd Straight Weekly Doji


The S&P500 (ES) edged lower yesterday as it forms a 3rd straight weekly Doji.  Although the ES has been the strongest of the index futures on my Watchlist, trading just under 2017 highs, the ES sits vulnerable to profittaking from just below upchannel resistance (on the daily chart).  While there is still a chance the ES will again power higher off the 4hr chart's uptrend support, I'll be patiently waiting for a break lower, and when it happens, I'll begin to look to go short.  The daily and 4hr RSI, Stochastics and MACD are sliding lower or consolidating recent losses.  Ideally, I'd like to short in the red zone (of the daily chart), targeting the green zone for mid next week.  The amber/yellow zone is where I might place a stop if I was a swing trader (although in my personal account which I seldom hold overnight I set my stops tighter). 

 

S&P500 (CME ES Sep17) Weekly/Daily/4hr/Hourly

 

Click here for today's technical analysis on USDJPY, Wheat

 

Tradable Patterns was launched to demonstrate that the patterns recurring in liquid futures and spot FX markets can be traded consistently profitably. Tradable Patterns’ daily newsletter provides technical analysis on a subset of three CME/ICE/Eurex futures (commodities, equity indices, and interest rates), spot FX and US equity markets, which it considers worth monitoring for the day/week for trend reversal or continuation. For less experienced traders, tutorials and workshops are offered online and throughout Southeast Asia.

 

This article is from Tradable Patterns and is being posted with Tradable Patterns’ permission. The views expressed in this article are solely those of the author and/or Tradable Patterns and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 

 


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Informative

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Tutte le informazioni pubblicate dai dipendenti di IB o dalle società affiliate si basano su informazioni ritenute affidabili. Tuttavia, né IB né le sue affiliate ne garantiscono la completezza, accuratezza o adeguatezza. IB non offre alcuna garanzia né assicurazione delle performance passate o future di alcuno strumento finanziario. Tramite la pubblicazione di materiale su IB Traders' Insight, IB non intende affermare che il particolare strumento finanziario o strategia di trading sia adatto a tutti.