No More Spiking the Punchbowl?
Signal Strength: Strengthening. Equity markets recovered from September’s losses and mostly turned in positive performance. Alternative credit products continued to set records for growth and issuance.
October Market Recap
The S&P 500 Index returned 6.91%
The Bloomberg Barclays U.S. Aggregate Bond Index returned -0.02%
Fed Funds Target Range: 0 – 0.25%
Economic Review
Positive economic data from the Fed’s Beige Book and rising consumer sentiment, as reflected by the University of Michigan survey, belied a lower-than-expected 2.0% third quarter GDP reading. It’s important to note that GDP growth is still positive, it’s just disappointing in relation to the 6.7% reading in the second quarter. The ongoing challenges to the supply chain as well continuing scarcity in the labor markets are weighing on the economic recovery.
The Fed must balance their data-driven approach to inflation with the very real possibility of raising rates too soon, which would stifle growth. The balancing act is complicated by the start of the long-anticipated withdrawal of government support of the bond markets, which was announced on November 3rd. Tapering will begin later this month with an initial decrease of $10 billion in U.S. Treasury purchases and a decrease of $5 billion in mortgage-backed securities, from the current monthly purchase amount of $80 billion Treasury securities and $40 billion mortgage-backed securities.
Market Review
All eleven sectors of the S&P 500 gained during the month. Consumer Discretionary did the best, adding 10.91%. Consumer Staples was up 3.71%. Energy was close behind, as it gained 10.18% for the month and is up 52.44% YTD. Volatility in the markets has increased somewhat but remains far below last year and not far from 2019 levels. As a comparison point, in 2020 there were 109 days that posted a 1% move, 64 up and 45 down. Year-to-date in 2021, there have been only 42 moves of at least 1%, 26 up and 16 down.
The Treasury yield curve flattened throughout the month, with the 30-year Treasury ending up 11 basis points lower at 1.93% as of October 29th. The 10-year Treasury pared back gains by 8 basis points in the last week of the month and ended the month at 1.56%. Short-term rates increased, with the 2-year and the 5-year Treasury ending at .50% and 1.19%, respectively.
Towards the end of the month, the yield curve inverted slightly when the 20-year Treasury yield rose above the 30-year yield several times. This was largely attributed to demand for more-liquid 30-year bonds and the expectation that the Fed meeting in November would reveal a more hawkish tone. Year-to-date the major fixed income sectors are still in the red, except for municipals. But they’re just squeaking by at .50%.
October notched another strong month in CLO issuance, with 39 deals totaling $19.15 billion, a hair behind August’s record $19.22 billion primary-market issuance. Annual new-issue volume of $149.37 billion through October 29th reflects the record-setting pace of deals this year. The CLO market also saw a milestone in October as the first U.S. CLO issuer priced a note tranche tied to the Federal Reserve-published secured overnight financing rate, SOFR, the replacement for LIBOR.
Private debt has been in the headlines recently as the asset class demonstrated resiliency throughout the pandemic and investors in search of yield are turning to alternatives. S&P Global has taken a close look at private debt with a recent report comparing it to syndicated loans. The report highlights several key differences:
- Private debt deals see borrowers working more directly with lenders, which allows for quicker turnaround (about two months from inception to execution), and borrowers have more clarity on pricing as they negotiate directly with the lender, instead of submitting to the syndicate market’s shifting conditions.
- Unlike in the broadly syndicated loan market, covenants are still written into most private loan agreements.
- Finally, firms facing liquidity needs that cannot access the public capital markets often turn to private debt, particularly during periods of market stress. This ability of private debt to be “bear market capital” for firms, at a price, was demonstrated by the growth of the asset class through 2020 and 2021.
