Weekly Market Summary

Extra Credit^*

• Treasury yields increased for the week, with the intermediate sector underperforming along the curve. In the week, Fitch downgraded the U.S. sovereign rating from AAA to AA+, citing fiscal deterioration, a growing government debt burden, and eroded fiscal confidence stemming from repeated debt-limit standoffs. While the Treasury market was highly volatile in the wake of S&P 500 Index’s downgrade in 2011, the underpinnings of the U.S. economy then were very different than they are now, and expectations for similar levels of volatility across the Treasury curve remained low.
• Recovery rates for high-yield bonds have slid to a record low with five of the 12 recoveries tracked over the last year in the single digits. Meanwhile, recovery rates for leveraged loans are well below their historical average and at a record low due to the impact from the loan-only issuer base. Recoveries for high-yield bonds and bank loans on a last-12-months basis are 19.6% and 39.7%, respectively, which compare to their 25- and 24-year annual averages of 40.2% and 64.3%, respectively.
• Default activity moderated in July, registering the fewest number of defaults/distressed exchanges (4) and second lowest volume impacted ($3billion) in 2023. The high-yield bond default rate also declined month-over-month, while the leveraged-loan default rate increased to a new two-year high. Specifically, two companies defaulted and two completed a distressed exchange during the month totaling $3 billion in bonds and loans—$495 million in bonds and $2.5 billion in loans.
• The trailing 12-month default rates for bank loans and high-yield bonds, excluding distressed exchanges, finished the month at 2.33% and 1.18%, respectively, up from 2.41% and 1.64% from May. The long-term historical default rate for loans and high-yield bonds is 3.1% and 3.2%, respectively.

Sources: Bloomberg and JP Morgan as of 8/2/23.