Weekly Market Summary

Extra Credit^*

• A dovish sounding Fed, investment grade corporate yields back around 5.50% and slowing issuance versus still strong demand - it’s hard to think of a better backdrop for spreads. Indeed, spreads rallied consistently a few weeks ago and into this week to bring us right back to the year-to-date (YTD) tights. Absent a material move in yields, it’s hard to see what will slow a potential steady grind tighter. Supply has already begun to slow somewhat with $112 billion month-to-date and this should improve further. April is typically a lackluster month for issuance with $94 billion on average over the last 4 years (and last year it was actually the  lightest month of the year with just $67 billion). Demand remains strong with 20 consecutive weeks of investment grade fund inflows, totaling $82 billion so far this year and it’s fair to expect some quarter-end rebalancing out of equities into bonds next week given the significant outperformance of the latter.
• It has been a strong few weeks for the asset-based security (ABS) market with spreads holding firm amidst healthy primary and secondary activity. New issues continued to see robust oversubscription and pricing levels across the capital structure, sectors and issuers, while secondary saw balanced two-way flows. By estimates, roughly 110+ issuers have sold $86.4 billion in quarter one this year already versus 80+ for a total of $59.6 billion in quarter one last year. While in secondary, year-to-date volume is 27% higher versus same period last year.
• YTD spread performance in emerging market sovereign credit has been characterized by high yield and investment grade compression. While emerging market investment grade sovereign spreads are, on aggregate, broadly unchanged this year, emerging market high yield sovereign spreads are 40 basis points tighter. This has been led by a favorable global risk environment, albeit this has not been the only driver behind the compression trade. Notably, there are some     fundamental factors that have supported these market moves. A number of positive idiosyncratic developments, such as in Egypt, have sparked significant spread rallies among some high yield sovereigns.
• Beyond the individual stories in emerging market credit, fundamental trends have also been supportive. This has been reflected in YTD rating changes, as upgrades have significantly outnumbered downgrades (with upgrades of Uruguay and Qatar earlier this month being the latest examples of this favorable trend). And the latest rally in a number of relevant commodity prices should also provide some fundamental tailwinds, especially for commodity-exporting frontier economies, such as those in Sub-Saharan Africa.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month at 1.77% and 1.66%, respectively, down from 1.95% and 2.04% in January. 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 3/25/24.