June 18~24, 2023 Collection of Articles
Analysis on 10-year Treasury Yield
BCA Research states that the 10-year Treasury yield is expected to be capped at 3.85% for the rest of the year, unless certain conditions are met. This yield was reached in May and has remained at this level in June.
Reasons for capped yield:
Anticipated downside in core inflation (excluding food and energy) over the next six months.
The Federal Reserve's indication of only two potential rate hikes this year.
Risks to this scenario include:
Persistent inflation in non-housing core services.
Wage growth in the healthcare industry, which could prompt the Fed to continue raising rates and push bond yields higher.
Market's expectation that the Fed may not deliver the additional rate increases it projected for 2023 in June.
Consensus around a "bullish bond view" poses a contrarian indicator, suggesting a potential risk.
The U.S. inflation rate, as measured by the consumer-price index, decreased to 4% in May after peaking at over 9% last summer. The article also mentions the recent decline in stock prices and the anticipation of Federal Reserve Chairman Jerome Powell's congressional testimony, which could offer insights into the future interest rate outlook.
Oracle Corporation's Stock Price Rises 30% Due to AI Advancements
Credit Analyst's Concerns
A credit analyst, Dave Novosel, remains concerned about the company's leverage. While Oracle's revenue grew by 17% in its latest quarter, Novosel questions the sustainability of its momentum.
The Impact of Cerner Acquisition
Novosel attributes much of the expansion to the Cerner acquisition, which has now cycled, causing Oracle to lose a key driver of growth. The Cerner deal has impacted Oracle's margins, and although the company expects to improve them over time, Novosel predicts a modest decline in gross margins this year.
Expectations for Cash Flow and Leverage
Despite this, Novosel expects Oracle's free cash flow to be slightly better than the previous fiscal year, with a portion allocated to reducing debt. He anticipates a decrease in the company's leverage ratio, but it will still remain high.
Distressed High-Yield Bonds: Altice USA, Carvana, Community Health Systems, Lumen Technologies, and Rackspace Technology Drive Gains
About two-thirds of the recent rally in the CCC-rated category of distressed debt is driven by a small group of companies, including Altice USA, Carvana, Community Health Systems, Lumen Technologies, and Rackspace Technology.
The overall performance of these bonds has contributed to a decrease in the ICE BofA US High Yield Index spread, which measures the yield spread over the risk-free Treasury rate.
The Federal Reserve's aggressive interest rate hikes in recent years have led to an increase in corporate defaults, particularly among riskier companies that took on cheap debt during the pandemic.
While some investors have expressed concerns about a potential market bubble, the distressed segment of the bond market has seen increased investor interest in the past week.
International Equities Experience Broader-Based Boom
The rally in U.S. stocks this year has largely been driven by mega-cap tech stocks
MSCI All-Country World Index ex-U.S. has broken out of a 15-year trading range, indicating significant growth
Japan saw the largest inflows in 12 weeks following the Nikkei 225 reaching a 33-year high
The US government is providing a conditional $9.2 billion loan to Ford Motor Co. for the construction of three battery factories as part of President Joe Biden's industrial policy to support American manufacturers in green technologies. The loan, the largest government backing for a US automaker since the 2009 financial crisis, aims to help Ford catch up to China in electric vehicle (EV) production. The factories, being built in Kentucky and Tennessee through a joint venture with South Korean battery giant SK On Co., will enable Ford to significantly increase its EV production to 2 million vehicles by 2026.
The loan is being issued by the US Department of Energy's Loan Programs Office (LPO), which has disbursed nearly $33 billion over the past 14 years. The LPO's goal is to support emerging companies in scaling up new technologies. While Ford's battery technology may not be cutting-edge, the loan is seen as crucial for US industrial strategy and aims to increase domestic manufacturing of battery supply chains.
The loan comes at a time when the US is trying to compete with China, which has dominated the global battery supply chain, accounting for over 80% of lithium-ion battery cell manufacturing capacity. China has heavily subsidized its EV market and supported battery businesses, leading to the rise of battery giants like Contemporary Amperex Technology Limited.
The LPO, which had experienced a period of inactivity under the Trump administration, is now an essential tool in the US response to China's dominance in green technologies. The office has received a significant number of loan requests, amounting to around $120 billion, indicating the growing interest in government support for EV and battery projects in the US.
While there is bipartisan support for countering China and expanding domestic capacity in strategic industries, there are challenges to achieving the goal of reducing US greenhouse gas emissions and increasing EV sales. The US will continue to rely on China for refined metals, and the transition to domestic supply chains will take time. However, the incentives embedded in the Inflation Reduction Act, including tax rebates and subsidies, aim to boost EV sales and domestic manufacturing.
The US government's support extends beyond Ford, as it has also provided loans to companies like Tesla and GM. Other countries, such as Canada, are also offering financial assistance to attract key players in the EV and battery industries. While government support for profit-making private companies may face criticism, analysts consider the US funding relatively modest compared to China's investments.
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