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Weekly Market Summary
Apr 29 to May 3, 2024
Extra Credit*
- The correlation between credit and equity is relatively low. The current six-month correlation between the investment grade corporate bonds and the S&P 500 is lower than the 20-year average. However, this is normal, given the low spread environment, as the beta and R2 between stocks and credit are typically near their lowest levels when the index is tighter than 100 basis points. Furthermore, Treasury yields have increased to year-to-date highs at the same time. This has helped demand for investment grade corporate bonds and kept a lid on spreads.
- The relationship between investment grade corporate bonds and equity is most salient during large equity moves. Investment grade corporate bonds and equities tend to move together most of the time. However, the relationship is strongest at the issuer level when the corresponding stock has a swing of 10%+. The relationship has actually taken a much stronger hold in recent years. Furthermore, in years with increased spread volatility, such as 2020 and 2022, the relationship picks up as well.
- Equity sell-offs matter much more than rallies for credit. In 10%+ equity sell-offs for a specific ticker, credit spreads tend to widen approximately 4 basis points for each 1 percentage point move in the underlying equity. That is not the case when the stock rallies10%+: this has had no tangible effect on spreads on average.
- While the investment grade corporate bond market tends to be mostly comprised of lower quality single-A and BBB corporate bonds, the non-investment grade high yield bond market tends to be mostly comprised of higher quality BB and single-B names. Currently, the passive investment grade bond market is 1.8x the size of the passive high yield bond market.
- Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month at 1.86% and 1.67%, respectively, up from 1.77% and 1.66% in February. The 25-year historical default rate for loans and high-yield bonds is 3.00% and 3.40%, respectively.
Sources: Bloomberg and JP Morgan as of 4/29/24.
Previous reports
*Source: Morningstar®, Bloomberg, Credit Suisse. OAS is Options Adjusted Spread. 4-year discount margin is used for spread for bank loans. Yield quoted is yield-to-worst or equivalent calculation. YTD Low / High for yields are based on end of week and not intraday movements. Indexes and sub-indexes: Investment-grade corporates represented by Bloomberg US Corporate Bond Index. High-yield bonds represented by Bloomberg US Corporate High Yield Index. Bank loans represented by Credit Suisse Leverage Loan Index. The red and green arrows depicted under Yields, Option Adjusted Spreads, and Prices indicate a higher or lower value from the previous week.
Past performance does not guarantee future results. Index performance is not indicative of fund performance. Indexes are unmanaged and it is not possible to invest directly in an index.
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