Weekly Market Summary

Extra Credit^*

• The intermediate BB-BBB basis has compressed to year-to-date tights. Since mid-June, BBs have tightened, and BBBs have widened. As a result, the BB-BBB basis has compressed substantially, the tightest it has been since January 2020. The BBB/BB ratio has compressed 0.25x in June and is close to multi-year low. While some of the basis compression can be explained by the fact that both investment-grade and high-yield spreads are tight in general amid sustained demand for all-in-yield, the relationship also looks extremely compressed when viewed as a ratio of spreads rather than a difference.
• Investment-grade credit new-issuance activity for 2024 keeps surprising to the upside. Although expectations are for supply to slow after a record first quarter, primary markets have been robust in USD. In fact, seasonal trends imply $1.41 trillion for 2024 given the year-to-date pace, which would be about $200 billion above current forecasts. Many issuers have pulled issuance forward, and presidential-election uncertainty should drive lower supply in the last half of 2024. Issuers have likely stepped up issuance in the first half of 2024 because of concerns about the election, opportunistic issuance based on rates, and a constructive spread environment.
• Year-to-date investment-grade credit supply is the second largest on record at $805 billion (behind only 2020). Relative to this time last year, issuance is up 19% year-over-year, as the primary market has been extremely active after a downswing as issuers held out for lower rates in 2023. When excluding 2020, year-to-date volumes are larger than previous years by a wide margin, over $70 billion/10% higher than the next most active year. If you simply assume the seasonal average in the second half of 2024 based on first-half volumes, 2024 year-end would sit at about $1.41 trillion in issuance, behind only the $1.69 trillion 2020 record.
• Non-financials have been the driver in overshooting expectations. Industrials and utilities have combined to issue $475 billion so far this year, up 13% from last year (12% year-over-year in industrials, 19% in utilities) and representing 70% of our full-year forecast entering the year. Financials are up 29% year-over-year, but because of COVID-related issuance, there was a massive increase in the maturity wall for this year, telegraphing a jump in gross issuance.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished May both at 1.25%, respectively. This was compared to 1.32% and 1.55% from April, as the high yield default rate were 30 bps lower and the loan default rate now sit at a 16-month low. The long-term historical default rate for loans and high yield bonds was 3.0% and 3.4%, respectively.

Sources: Bloomberg and JP Morgan as of 7/1/24.