Weekly Market Summary

Extra Credit^*

• Although BBBs have outperformed single As across the curve during the rally, the 5-year and 10-year maturity buckets are trading very close to the tight ends of their ranges post-Global Financial Crisis (2007-2008). For the 10-year, levels are the most compressed since last May, and for the 5-year, they are the tightest since late March 2023 (in the wake of the regional banking crisis). It's also notable the compression has occurred in two of the more liquid parts of the curve. Potential drivers of the move include investors' growing interest in liquid BBBs to add beta during the recent rally and the uptick in single A issuance relative to BBBs. Single A industrials have made up 50% of supply since December 2023, up from 42% in the rest of 2023.
• High-yield dollar prices remain low across the board, as 20%of the index trades below $90 and more than 75% trades below par. This is likely due to the low coupons set during COVID and the subsequent spike in rates. Because of this, investors may want to consider yield-to-current for bonds trading below par vs. just yield-to-worst. Low dollar prices have skewed the often-cited yield-to-worst metric leading to understated actual realized yields since issuers rarely allow their bonds to become current (i.e., less than one year to maturity). The index yield is currently 45 basis points higher when accounting for this dynamic. 
• For those investors who want to consider asset-backed securities (ABS), they should be aware the universe consists of AAA rated notes with weighted average lives (WAL) of three years or less. But for those investors looking for duration in ABS, rate-reduction (RR) ABS, also known as stranded-asset ABS, is a place to start for some of the following reasons - Index inclusion: The sector is a component of the Bloomberg US Aggregate Bond Index. Low credit risk: Credit quality of RR ABS is mostly AAA rated. Increasing issuance: There has been an uptick in primary supply over the past few years. Duration: The availability of tranches with 20-plus-year WAL at new issue.
• RR ABS are typically issued by utility companies to recover costs associated with various initiatives such as environmental cleanups, and energy transitions, as well as hurricanes, wildfires and other natural disasters. The utility companies raise capital by issuing bonds that are serviced by charging fees (surcharges) to the utility's consumers, based on usage.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month at 1.95% and 2.04%, respectively, down from 2.10% and 2.08% in December. The 25-year historical default rate for loans and high-yield bonds is 3.0% and3.4%, respectively.

Sources: Bloomberg and JP Morgan as of 2/27/24.