Corporate Credit Highlights

• Citi Research on fund exposure to mortgage-backed securities (MBS) and Treasuries in April: “The large funds we track increased their MBS overweights to 14.1% in April, a 0.8% increase month-over-month. This is a new historical high since we started tracking the series in 2016. Allocation to Treasuries surged by 4.1%, but funds remained 17.3% underweight versus the index. Corporate allocation declined modestly by 0.1%, while overweights in other products, which typically include other securitized products, emerging markets, and derivatives, plummeted by 4.9% to 3.7%.” ¹‍
• BAML on June issuance: “We look for investment-grade (IG) June issuance in $110 - $120 billion range. That would be the highest supply for the calendar month of June since 2021, but in line with our $1.58 trillion full year 2025 supply forecast. June issuance volumes have been growing since the lows in 2022, and we expect that to continue this year on higher maturities. The risks to our June supply forecast are balanced. On one hand, conditions remain favorable for supply. Demand is strong, evidenced by strong new issue performance in May. Despite the recent back up in rates, IG corporate yield is currently about in the middle of the range so far in 2024, while spreads are near the tight end of the range. IG maturities remain elevated in June. Finally, issuers should be pulling supply forward while market conditions are favorable to avoid having to issue into a weaker market in case market volatility returns. On the other hand, a return of volatility could again disrupt the primary market in June. Both rates and spreads experienced significant volatility in April and May, impacting supply. Issuance slowed in April, and the lost volumes were made up in May. Potentially weaker conditions in June again create downside risks to issuance.” ²

• J.P. Morgan Strategy on the implied loan default rate: “The implied default rate for a loan spread to 3 years of 457 basis points (bps) is 1.89%. This is below the mid-point of our 2025 and 2026 leveraged-loan default rate forecasts of 3.25% and 4.75%, respectively. Using a historical average excess spread of 362 bps and recovery rate of 50%, our 2026 loan default forecast of 4.75% implies a loan spread of 600 bps by yearend 2025 or 5 0bps above our 550 bps yearend target. Who do excess spreads for leveraged loans run about 50dbps higher than bonds? We see this as consistent with the more challenged fundamental narrative overhanging loans emanating from exposure to higher rates and more aggressive capital market proceeds exiting the pandemic.” ³‍
• LCD note on May loan performance: “The U.S. leveraged loan market posted a strong comeback in May, rising 1.55% — its best monthly return in 17 months — as prices rebounded and risk appetite resumed, supported by easing trade tensions and improving consumer sentiment. On the new-issue front, activity showed signs of recovery, though year-to-date volume remains 24% below the pace set in 2024.  Drilling deeper into the picture for loan returns, following consecutive monthly declines, the Morningstar LSTA US Leveraged Loan Index rose 1.55% in May, marking its strongest monthly performance since December 2023. The rally was fueled by a 0.87% market value return, reflecting improvements in trading market prices. This was not only the first positive market value return since January, it was the highest in nearly two years.” ⁴
• JPM Strategy on default rates: “Including distressed exchanges, the par-weighted U.S. high-yield bond and loan default rates increased 8 bps and decreased 36 bps month-over-month to 1.33% and 3.62%, respectively. For context, the 25-year average high-yield and leveraged-loan default rates are 3.4% and 3.1%, respectively, and the post-GFC averages are 2.5% and 2.4%.” ⁵

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• J.P. Morgan Strategy on last-12-months spread range for high yield (HY): “High-yield spreads of 355 bps are at 33% of their 178 bps trading range over the past 12 months. Notably, 10 of the 20 industries trade between 25% and 45%, while three sectors trade on the end of their range (telecom: 4%, utility: 10%, and food/beverage: 12%) and three sectors trade at or above their mid-point range (energy: 65%, retail: 63% and transportation: 50%).” ⁶‍
• BAML Strategy lowering its high-yield spread target: “Given easing conditions, we have lowered our spread targets to 375 bps for HY and 475 bps for loans. We are keeping a +/- 50 bps trading range to reflect still high levels of uncertainty emanating from the final outcome of U.S.-China negotiations in 90 days, lingering fundamental concerns, and tight valuations. Recession risk may have been alleviated, but tariffs are still coming. In the aftermath of the tariff roller-coaster ride, which triggered a precipitous decline in sentiment, all eyes are on the trajectory of LevFin fundamentals.” ⁷

Definitions
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• Assets under management (AUM) is the total market value of the investments managed by a person or entity on behalf of investors.
• Bank loans (also known as floating-rate loans or leveraged loans) invest in bonds and other fixed-income securities that have variable, as opposed to fixed, interest rates.
• A basis point is one hundredth of a percent, so 100 basis points is equivalent to 1%.
• A bond isa fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.
• A corporate bond isa debt security that is issued by a company to raise capital.
• A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity.
• The credit market refers to the marketplace through which companies and governments issue debt to investors in exchange for regular interest payments. ‍
• Credit rating is when bond ratings are grades given to bonds that indicate their credit quality as determined by private independent rating services such as Standard &Poor's, Moody's and Fitch. These firms evaluate a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from `AAA', which is the highest grade, to `D', which is the lowest grade.
• Credit spread is the difference in yield between two debt securities with the same maturity but different credit quality.
• Derivative is a type of financial contract whose value is dependent on an underlying asset, a group of assets, or a benchmark. It's an agreement set between two or more parties that can be traded on an exchange or over the counter.
• ‍Duration is often used to measure a bond’s or fund’s sensitivity to interest rates. The longer a fund’s duration, the more sensitive it is to interest-rate risk. The shorter a fund’s duration, the less sensitive it is to interest-rate risk.
• Distressed Exchange is a negotiation process between a financially troubled company and its creditors where the company seeks to restructure its debt without filing for bankruptcy.
• ‍High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• The ICE BofA US Corporate Index isa benchmark index that tracks the performance of investment grade corporate debt in the United States.
• Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody’s.
• Investment Grade (IG) Index refers to the ICE BofA US Corporate Index.
• An issue or issuance is a process of offering securities in order to raise funds from investors. Companies may issue bonds or stocks to investors as a method of financing the business.
• Implied default rate is a measure of the market's perception of the likelihood that a borrower will default on their debt obligations.
• ‍Leverage refers to using debt (borrowed funds) to amplify returns from an investment. A leveraged loan is a type of loan made to borrowers who already have high levels of debt and/or a low credit rating. Lenders consider leveraged loans to have an above-average risk that the borrower will be unable to pay back the loan (also known as the risk of default).
• ‍Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
• Maturity (or maturity wall) is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist.
• Morningstar LSTA US Leveraged Loan Index is a market-value weighted index designed to measure the performance of the US leveraged loan market.
• Mortgage-backed securities (MBS) are investment products backed by a pool of mortgage loans.
• ‍Option adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return.
• Par-weighted refers to a method of calculating averages where the individual values are weighted by their par (face) value. This means that larger holdings or transactions have a greater influence on the final average.
• Post-GFC refers to the period following the Global Financial Crisis (GFC), which began in 2007-2008. This period is characterized by economic recovery, changes in financial regulation, and evolving global financial systems.
• A refinance (ReFies) refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage.
• ‍Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, represented by Treasury bonds. Spread income refers to the additional income from this difference.
• The 10-year treasury bond yield is the interest rate the U.S. government pays to borrow money for a decade, serving as a benchmark for other interest rates and a key indicator of investor sentiment about economic conditions.
• Total Return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period.‍
• Weighted Average Coupon is the average gross interest rate of the underlying mortgages in a mortgage-backed security at the time it was issued.
• Yield isa measure of the profit that an investor will be paid for investing in a stock or a bond. It is usually computed on an annual basis.
• Yield to worst (YTW) estimates the lowest possible return on a bond without the issuer defaulting.