Junk Bond Bear Market? – Since around mid-2014, junk bonds have felt the sting of declines particularly as crude oil prices have fallen. A sizable portion of the high yield market is based in commodities companies’ debt, which has been hit across the board as gas, oil, iron ore, and coal prices have declined. But two issues emerged this week that added fuel to the fire. The first was the Fed rate hikeand language related to gradual hikes over the next three years, which stoked fears about tighter credit markets moving forward.
The second was more ‘panicky’ in nature, when the investment firm Third Avenue Management froze withdrawals from its ~$1B high-yield bond fund. Markets of all kinds generally do not like restrictions and new regulations, and the move induced some warranted fears. The high yield category declined some 5% in the third quarter alone, which has ultimately resulted in the first negative year since 2008. With more rate hikes ahead and a general sense of monetary policy tightening from here, we don’t expect a “v-shaped” bounce in the junk bond market.
Natural Gas and Crude Oil Prices Keep Tumbling – natural gas prices in the U.S. have now sunk to their lowest level in over ten years this week. A late winter onset in the Northeast is largely to blame, with mild temperatures tempering demand/usage. Crude prices have felt similar pressures, but mostly on continued oversupply concerns. At one point this week, oil traded below $35 a barrel. We continue to think oil prices are in a bottoming pattern here, though expectations for an actual rebound in price could be a few months off.
U.S. Lawmakers Could Lift Ban on Crude Exports – after nearly four decades, U.S. lawmakers have finally made moves to lift the ban on crude oil exports that resulted from the 1973 Arab oil embargo. The deal is a win for Republicans who attached it to a spending and tax package, which will be voted on as early as Thursday. On the other side of the aisle, a win came in the form temporary wind and solar power tax credits set to expire several years down the road.
The Federal Reserve Raises Rates! Now What? The Federal Open Market Committee met Wednesday and announced the first hike to the benchmark interest rate since June 2006, from the zero bound to 0.25% – 0.5%. Janet Yellen said in her statement that she expects the FOMC to raise rates to 1.5% by the end of 2016 and 2.5% by late 2017, with a longer-term goal of getting the benchmark rate to historical averages (3.5% or so) by 2018. The market response to the Fed’s interest rate was nicely positive, with the S&P 500 rising +1.45%, but we’d be more cautious looking ahead. As gradual rate hikes start to create modest headwinds to the already leveling economy, more volatility could set in. A handful of big banks already announced they would increase their prime rates in the wake of the announcement.