Tim Leary, Senior Portfolio Manager on the BlueBay U.S. Fixed Income Team, discusses where we expect the market to go through the end of the year.
Watch time: 2 minutes, 11 seconds
View transcript
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. The most topical news this week has been President Biden ending his reelection campaign. Odds are Vice President Harris will be nominated. Trump is still favored to win, but there are more than a hundred days to go before election day November 5th and that’s an eternity. So, whatever your predictions, two things are true – one- they will probably annoy someone you’re out to dinner with and two, we won’t know until November if you’re right. So rather than getting bogged down on it, lets focus on the market.
The leveraged finance market continues to see inflows ahead of expected rate cuts. The retail high yield market saw 2.6 billion into mutual funds & ETFs last week. That was the largest weekly inflow in 8 months. In fact, 10 of the last 13 weeks have seen net inflows. And so, it shouldn’t surprise you that triple C risk outperformed all other rating bands last week. This continues to feel like the pain trade for most High Yield managers who are positioned like the sky is falling.
Now, it’s fair to say, that spreads have moved 30bps tighter year to date and that the double B market is rich compared to Investment Grade bonds. But we’re investing for the rate environment we expect six months from now and not six months ago. As we think about rate curves into the first half of next year, we expect to see a steepening. Meaning we expect the two-year treasury to yield less than the ten-year treasury. Remember, that is a normalization more so than anything out of left field. We think the curve shape is likely led by front end rates going lower as opposed to ten-year rates going materially higher, but even if it does, the high yield bond market with its shorter 3.4 year duration should stand out.
Thanks for your time & good luck trading!
Summary points
Recently, political news has garnered the top headlines.
Meanwhile, the leveraged finance asset class continues to see inflows ahead of expected rate cuts.
As we think about rate curves into next year, we expect to see steepening.