Weekly Market Summary

Extra Credit^*

• Business development companies (BDCs) own approximately 40% of the investable private-credit universe in North America, according to published quarterly investment schedules with fair-value marks.
• While BDC fundamentals are in good shape as asset yields have risen meaningfully and growth has remained strong in parallel with the broadly syndicated market, some signs of stress are emerging amid asset quality deterioration. For example, the percentage of BDC assets paying payment-in-kind interest has increased in recent years, which can eventually become problematic for BDCs that are required to pass through income to shareholders.
• In addition to its healthy yields, private credit's reduced volatility versus broadly syndicated markets has helped attract capital in recent years. The lack of volatility is caused by the asset class’s illiquid nature, which tends to distort the volatility of the securities.
• Emerging-market local assets ended 2023 on a strong foot, as the narrative between emerging markets and developed markets found some alignment. Developed markets' central banks are now on a pathway for cuts, as inflation normalizes and growth slows. But markets have taken a breather, and consolidation is natural after a move of this magnitude. With the U.S. economic data remaining strong, markets will likely continue to vacillate on the timing of the Fed's first interest-rate cut. But this should not create a large obstacle for emerging markets since the Fed has telegraphed the next move will be a cut. This should be enough to propel emerging-market currencies to gain ground on the dollar.
• Dollar demand picked up at the start of 2024, partly reversing end-December price action, and some expect this to continue. Markets appeared too quick to embrace “disinflation” as a key market driver in the fourth quarter and were not necessarily pricing the relative positions across different economies accurately. Accordingly, the optimism generated by dovish surprises seems to be much larger in smaller, open economies such as New Zealand and Canada or larger economies facing challenging domestic demand conditions such as the eurozone than in the still-resilient U.S. economy. Recent inflation releases and Fed comments have not altered this view that cuts will be coming this year, but investors will be listening closely to remarks from Fed members on whether they believe inflation is headed toward the central bank’s objective of 2%.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month at 2.10% and 2.08%, respectively, up and unchanged from 2.01% and 2.08% in November. The 25-year historical default rate for loans and high-yield bonds is 3% and 3.4%, respectively.

Sources: Bloomberg and JP Morgan as of 1/9/24.

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