Tim Leary, Senior Portfolio Manager on the BlueBay U.S. Fixed Income team, reflects on the volatile year-to-date and how the high yield bond market is set up for the rest of the year.
Watch time: 2 minutes, 19 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.
Well folks, we’re about halfway through the year & US High Yield Corporate bonds have outperformed Investment Grade and leveraged loans on both sides of the Atlantic. Double Bs have led the way and credit spreads reflect that. In fact, Contingent Convertible (CoCo) bonds and EMHY are the only two corporate benchmarks ahead of HY thus far. So, as we sit here today, a week or so away from the July 9th tariff extension deadline, what’s the trade for the rest of the year? The technical landscape is incredible. We’ll likely see rate cuts in the 2nd half of 2025. Consumer cash balances are at all time highs, credit card utilization rates have normalized, unemployment is low & we should see progress on trade & budget in the coming weeks and months.
Nevertheless, there is still investor hesitation to add risk. Money market balances are north of $7bln, and even when you back out the corporate money market balances, the number is still at record highs. Where is all that cash going to go when the Fed starts to cut rates? Does it pile in to equities at the all-time highs? Or will it leg into credit again. The answer is likely both. That’s a set up that lends itself to spread compression. That said, we’ll start to get 2Q earnings and there will inevitably be misses and guidance that differs from street expectations. Consider this: according to JPMorgan, there is a “Consumer Cash Pile” which combines balances from checking, savings, and consumer money market funds that set a new record as of the end of the 1st quarter of $21.7 Trillion up from $14.8 trillion at the end of 2019.
We know you shouldn’t fight the fed, but it sounds like you shouldn’t fight the American consumer either. High yield bonds, which are higher quality than at any point in history, could be segment of the market to see inflows from clients who are wary of the run the Mag 7 has had.
As always, thanks for your time & good luck trading.
Key points
US high yield bonds have performed very well this year, and the environment remains strong for continued success.
Consumer cash and money market balances are both at all-time highs, which could be put to work.
High yield bonds, which are higher quality than at any point in history, could potentially see significant inflows.