Corporate Credit Highlights

• Bloomberg US Corporate Index August recap: The index "ended August 6 basis points wider at an option-adjusted spread (OAS) of 118 with the index yielding 5.61%, a touch off the year-to-date highs of 5.87%, which we hit mid-August in the rate selloff. The rate volatility dominated the first half of the month with a significant amount of events dictating the selloff, including a Bank of  Japan yield curve control (YCC) policy shift, Fitch’s downgrade of the U.S.’s credit rating, the non-farm payroll report, Treasury auctions, etc. On the primary side in August, we saw just $69 billion come to the market vs. expectations of $85 billion, which was the lightest August since 2015 and down 40% vs. 2023.” ¹
• JP Morgan Strategy on August new issue coupon vs. maturing coupon: “The average coupon of new issues was 5.74%, which is 235 basis points higher than the average coupon of maturing bonds of 3.39%. The coupon gap at 235 basis points has increased from 223 basis points last month but remains below the year-to-date high of 253  basis points in July. This brings the year-to-date gap to 206 basis points as compared to 90 basis points last year.” ²

• BAML strategy on August defaults: Defaults have claimed another $1.2 billion of high-yield face value in August, but over the prior 12 months, the default rate actually has gone down to 2%. A year ago in August, we saw $6.2 billion in defaults, a recent peak. ³
• Citi Strategy on year-to-date supply: “Year-to-date issuance for 2023 now stands at $111 billion, a 44.2% increase from 2022. Relative to prior years, however, this year remains slow with 2023 on a seasonally adjusted pace for $156 billion. If that pace holds, it will represent the second-quietest year since the Global Financial Crisis. The recent trend of shortening new-issue maturities has accelerated this year. To date, supply’s average maturity is just 6.2 years, significantly shorter than 7.1 years in 2022 and 7.7 years in 2021.” ⁴

• JPM Strategy on loan technicals: “The institutional loan universe has contracted by $97 billion or 6% since June2022 to $1.55 trillion after expanding by $1 trillion over the past decade. Note: $77 billion of the contraction in the leveraged-loan universe has occurred in 2023 (or 4.7% outstanding). These conditions are due to a collapse in net new issuance, an increase in bond-for-loan takeout activity, steady retail outflows, and the rapid growth in the private-credit universe. Note: robust capital markets, steady demand from collateralized loan obligations(CLOs), and a surge in the number of loan-only borrowers caused the leveraged-loan market to grow at a 11% compound annual growth rate between 2012and June 2022.” ⁵
  
• Per JPM, the loan default rate decreased 4 basis points month over month to 2.92%.Of note, six of August’s 11 defaults/distressed transactions were from a loan-only borrower. ⁶
  
• BAML strategy on loan attractiveness at current levels: “Loans spreads continue to grind tighter with our loan index discount margin closing August at 479 basis points, a tightening of 8 basis points on the month. The average price of the index rose by $0.34 to a level of $96.06, new 12-month highs, too. Unlike investment grade and high yield, loan spreads trade significantly wider to the2018-2019 period, and more inline with 2014-2015. A combination of wide spreads and elevated short-dated Treasury rates have boosted leveraged loan expected yields, providing an attractive return vs. risk proposition for investors heading into year-end.” ⁷

Definitions
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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%.

The Bloomberg US Corporate Index is a broad measure of the U.S. investment-grade fixed-income securities market.

‍A collateralized loan obligation (CLO) is a single security backed by a pool of loans, collected into a marketable instrument via process known as securitization.

The compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.

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.

A credit spread, also known as a yield spread, is the difference in yield between two debt securities of the same maturity but different credit quality.

A discount margin is the average expected return of a floating-rate security (typically a bond) that's earned in addition to the index underlying, or reference rate of, the security.

The Global Financial Crisis was the sharp decline in economic activity that started in 2007 and lasted several years, spilling into global economies.

High-yield bonds, or junk bonds, are corporate debt securities that pay higher interest rates than investment-grade bonds.

‍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.

Maturity is the agreed-upon date on which the investment ends, often triggering the repayment of a loan or bond, the payment of a commodity or cash payment, or some other payment or settlement term.

Mortgage-backed securities (MBS) are investment products similar to bonds. Each MBS consists of a bundle of home loans and other real estate debt bought from the banks that issued them.

The option-adjusted spread (OAS) measures the difference in yield between a bond with an embedded option, such as a mortgage-backed security, with the yield on Treasuries.

Private credit is an asset defined by non-bank lending where the debt is not issued or traded on the public markets.

Treasury auctions is a public auction, held weekly by the U.S. Treasury, of federal debt obligations—specifically, Treasury bills (T-bills), whose maturies range from one month to one year.

Yield is the income returned on an investment, such as the interest received from holding a security.

Yield curve control (YCC) involves targeting a longer-term interest rate by a central bank, then buying or selling as many bonds as necessary to hit that rate target.

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