At 1.7% at the end of Q1, the U.S. junk bond default rate is off from 2.2% at the end of 2013, and at the lowest level since February 2008, according to Moody's. With the market yielding an average of just 5.2% (prior to 2012 it had never been below 6.5%), the default rate better stay low.
Moody's sees the default rate rising to 2.4% by year's end and 2.7% one year from now - both still well below the 20-year average of 4.5%.
It's not necessarily a booming economy, but instead welcoming debt markets which allow low-rated issuers to refinance at extended maturities and lower rates.
Retail sales showed some vibrancy in March led by solid gains from building material and garden equipment sellers (HD, LOW) and general merchandise chains (COST, WMT, CASY, TGT). A revision to February's retail sales mark also bodes well for the retail sector.
Sales at electronics and appliciane stores (BBY, CONN, HGG) moved in the wrong direction during the month, falling 1.6% M/M and 0.7% Y/Y.
A two-week streak of outflows is broken as investors put a net $273M into municipal bond funds and ETFs last week, according to Lipper data. The funds have seen inflows for 7 of the past 9 weeks, but they've been small and choppy, averaging just $21.9M over the last month.
RBC's Chris Mauro notes the typical late March/early April seasonal tax-time weakness is passing, and this week's inflows - like previous - have been nearly entirely concentrated in high-yield muni funds, with recorded their 14th consecutive week of net gains in assets.
I’m not quite sure why we would want to raise interest rates with a 1% inflation rate, no matter what the unemployment rate is," says Chicago Fed boss Charles Evans, delivering a strong dovish message for the 2nd time in two days. The "strong accommodation" should be left in place "in order to do the job that it’s intended to do."
Acknowledging the first rate hike is probably coming in late 2015, Evans would push it into 2016 "if I had my druthers."
A renewed tumble in the market's perkier names is trumping fast economic data (initial jobless claims dropped to a 7-year low) as Treasury yields slide to near their lowest level of the year, the 10-year off six basis points to 2.63%. TLT +0.7%, TBT -1.4%
Looking at Eurodollar futures, the Dec. 2016 contract has wiped off more than one 25 basis point rate hike in the past few sessions, now pricing in a Fed Funds rate of about 2% by the end of 2016.
"The good ole' days are gone," says UBS, cutting its recommendation for U.S. corporate bonds to "small underweight" ahead of what's expected to be the beginning of a rate hike cycle in about a year.
With spreads already so tight, any further gains from spread tightening will be marginal at best and not enough to make up for rate increases, says the team, which is bearish on both investment-grade and high-yield corporate debt.