The Federal Reserve (Fed) pivot narrative, beginning in late 2023, has seemingly taken hold of markets as traders anticipate when the Fed will start cutting interest rates. The CME Group’s FedWatch Tool currently forecasts the probability of a rate cut at the Fed’s March meeting at roughly 62% and the probability of a pause at roughly 36%, as of Jan. 16.1 However, last week’s hot consumer price index (CPI) print leaves the timing of the next Fed rate cut in question.2 On Tuesday, Fed Governor Christopher Waller went a step further when he said that the Fed should be more cautious in its approach to rate cuts.3
Taking a step back, PMAM’s Chief Investment Officer Mark Heppenstall highlighted the risks of the Fed’s shift to easier monetary policy in our 2024 Economic and Capital Markets Outlook. He describes the potential inflationary effect of rate cuts at a time when tight labor markets continue to place upward pressure on wages.
One thing is certain: the prospect of falling rates has stimulated activity in the primary market. The first week of 2024 has seen various new issues and a wave of repricings, as levered credits have looked to address some of their outstanding floating-rate debt in an effort to reduce interest requirements. Although my focus this week is not on high-yield credit fundamentals, it’s worth noting that those high-yield companies are being opportunistic in accessing the market — doing so to prudently improve credit metrics.
According to a recent Bloomberg article, “companies are rushing to borrow money in the high-grade and junk bond markets, with blue-chip debt sales approaching the highest for a January since 2017, as corporations look to take advantage of recent drops in yields.”4 As the timing and pace of rate cuts become clearer, more companies may access the primary market to address large 2025 and 2026 maturity walls. Moreover, companies are looking to refinance or issue new debt with the relief in rates since October 2023 and ahead of the perceived volatility stemming from the 2024 presidential election.
Investors have been looking for a meaningful supply of new deals, with some arguing that high-yield spreads have remained historically tight due to the imbalance between supply and demand. So far in 2024, the market has given investors what they’ve been seeking. A busy new issue calendar seems poised to continue during a period of easy money, and I believe we’ll see more loan repricings. The practice has become popular in 2024, primarily among leveraged buyout (LBO) credits as management teams look to address top-heavy capital structures; the use of floating-rate debt became common over the last few years partly due to investors’ desire for higher priority in the resulting capital structures.
Key Takeaway
Given recent events — December’s CPI report and Fed Governor Waller’s commentary — it seems less likely the Fed will begin cutting rates in March, although the probability is still pegged at 62% as of Jan. 16. The Fed cannot afford another policy misstep. For the time being, the primary market will remain open as rates are projected to fall over the course of 2024. While some companies will access the market to reprice their loans, others will have to come to market to refinance existing bonds. We’ll see companies looking to reduce borrowing costs while others refinance and accept higher coupons, seeing their borrowing costs increase. Most of the companies that will have to come to market to address upcoming maturities issued existing bonds during the zero interest rate policy (ZIRP) era. I believe we may see some specific instances of credit strain as borrowing costs increase for those companies. In the meantime, the market impatiently awaits any commentary regarding the timing of the first rate cut.
Sources:
1CME Group – FedWatch Tool; 1/16/24
2U.S. Bureau of Labor Statistics – Consumer Price Index – December 2023; 1/11/24
3CNBC – Fed’s Christopher Waller advocates moving ‘carefully’ with rate cuts; 1/16/24
4Bloomberg – Corporate Debt Markets Come Alive With Investors Eager To Buy; 1/16/24
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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