High yield has moved from worst to first over the past month, reversing over 200 bps of negative excess return to become one of the few domestic fixed income asset classes posting a positive total return this month. The stability of oil has helped drive investor interest back into the sector, with three consecutive weeks of +$2 billion in fund flows, making it the strongest move into HY in well over a year. The move back into high yield could potentially still be in the earlier stages, as the spread of double-B credits are presently 30 bps rich to last year's average index levels, while single-B credits are still 20 bps cheap. Given the recent and ongoing concerns with energy credits, the triple-C sector continues to lag from an absolute and relative perspective, which we don't envision reversing in the near term. From this perspective, while continued positive flows should support a down in credit trade, we would limit our exposure to moderately risky single-B credits at the moment.
As the economic table below indicates, there will be no lack of economic data in the upcoming week. Inflation headlines will continue to drive concerns over slowing price growth, as headline CPI and PCE are both expected to be negative. Core numbers are expected to be just barely positive, so it will be difficult to spin inflation concerns unless there are large upside surprises. The second revision to 4Q:14 GDP will also likely prove to be a disappointing headline, with expectations set at 2%, a downward revision from 2.6% from the initial release. We will also get Michigan confidence, ISM, durable goods and monthly auto sales. Of course, all this will lead to February's nonfarm report a week from this Friday. At this point, employment expectations remain solid with payroll gains in the 250,000 range, while the unemployment rate is expected to drop slightly. Last month's employment report proved pivotal in driving an improvement in risk sentiment, and we expect this report to have equal importance. Recent economic data has been generally disappointing as the surprise index chart below indicates, so we go into this avalanche of data from a nervous perch. Interestingly, European data has generally surprised to the upside recently, allowing the Euro to firm and the USD to trade sideways over the past few weeks.
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