BNY Mellon Capital Markets, LLC Weekly Market Commentary

While the dog days of summer set in on the financial markets, the risk rally of the past few weeks has generally remained in place. With little on the economic front and European leaders escaping to their summer villas, no news was good news as many risk assets approached year-to-date highs. Treasuries continued their trend toward higher yields, with the curve bear steepening, and reversing most of July’s rally in rates. Corporates have been one of the strongest performing asset classes during this mid-summer rally, although we see evidence that the spread rally is running out of steam. While HY has also rallied to near YTD tights, the same evidence we tracked on the investment grade front has yet to present itself in junk land. Having said that, investors have to develop an increased appetite for some of the most indebted issuers if HY is able to push yields lower. Issuance remains strong, with corporate treasurers pushing to lock in low yields before departing for their end-of-summer retreats. Although we do not see an immediate catalyst that will reverse these trends short term, we remain cautious of returning volatility in September, and therefore lean more toward a neutral stance as we endure these final days of summer.