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Extra Credit*

  • Recent macro data have been mostly positive with the recent PMI reports looking quite good. In particular, at 49.0, manufacturing is barely contracting now. Furthermore, the September job report showed employment re-accelerating, with limited wage pressure. The Atlanta Fed wage tracker confirmed that as well: it implies a slight deceleration of wage growth. Finally, the NFIB reported that small companies' sales and hiring plans are improving. However, they remain relatively pessimistic and are reporting tighter credit conditions.
  • The Federal Reserve is becoming more optimistic about achieving a soft landing. The Fed minutes revealed that it thinks that inflation will decline, with little labor damage. Furthermore, Fed speakers recently were signaling that they might not need to do more hikes, given the rapid rise in nominal and real rates. 
  • After the average interest coverage ratio for the investment grade corporate bond index reached all-time highs following COVID stimulus and zero interest rate policies, it has had a steady and steep decline since the Fed began raising rates. As more companies issue debt in this new environment, the pass-through effects of these rate hikes will be most clearly felt in rising interest costs. If interest coverage continues to follow the current trend, it could potentially fall to the post-GFC low of 10.7x vs. 12.6x now and 15.7x at the peak in 2Q22. More companies will therefore be tested in their ability to meet their debt obligations. 
  • The amount of debt coming due in the next two years is at all-time highs for both bonds and loans. This looming wall will pose challenges, particularly to bond issuers, as refinancing costs will be much higher, though the imminent maturities skew up in quality for bonds.
  • The trailing 12-month default rates for bank loans and high-yield bonds, excluding distressed exchanges, finished the month at 1.90% and 1.32%, respectively, down from 2.24% and marginally higher from 1.29% from August. 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 10/17/23.

Yield as of:
Oct 20, 2023
High-Yield Bonds
Investment-Grade Corporates
Last Week
Prior Week
Start of the Year
Option Adjusted Spread as of:
Oct 20, 2023
High-Yield Bonds
Investment-Grade Corporates
Last Week
435 bps
529 bps
120 bps
Prior Week
412 bps
525 bps
114 bps
Start of the Year
469 bps
592 bps
121 bps
Prices as of:
Oct 20, 2023
High-Yield Bonds
Investment-Grade Corporates
Last Week
Prior Week
Start of the Year

*Source: Morningstar®, Bloomberg, Credit Suisse. OAS is Options Adjusted Spread. 4-year discount margin is used for spread for bank loans. Yield quoted is yield-to-worst or equivalent calculation. YTD Low / High for yields are based on end of week and not intraday movements. Indexes and sub-indexes: Investment-grade corporates represented by Bloomberg US Corporate Bond Index. High-yield bonds represented by Bloomberg US Corporate High Yield Index. Bank loans represented by Credit Suisse Leverage Loan Index. The red and green arrows depicted under Yields, Option Adjusted Spreads, and Prices indicate a higher or lower value from the previous week.

Past performance does not guarantee future results. Index performance is not indicative of fund performance. Indexes are unmanaged and it is not possible to invest directly in an index.

Investors should consider a fund’s investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the Fund and are available from AristotleFunds.com. The prospectus and/or summary prospectus should be read carefully before investing.

Investing involves risk. Principal loss is possible.

Foreside Financial Services, LLC, distributor.

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