Weekly Market Summary

Extra Credit^*

• Fed commentary took a hawkish turn recently, as Chair Powell signaled that recent inflation data have increased uncertainty about when and if lower interest rates will come later this year. “The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence...Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work” (Fed Chair Powell, 4/16/24). The hawkish shift was reinforced by comments from NY Fed President Williams, who, when asked, indicated that a rate hike would be possible if the data warranted, but that it was not his base case.
• Markets have reacted negatively to the prospect of higher-for-longer rates. Strong growth, above-trend inflation, and a hawkish Fed have pushed out expectations of Fed rate cuts and helped shift the Treasury curve higher, with yields in both the front and the long end at least 35 basis points higher so far in April and now back at levels last seen in November 2023. Equities have also reacted negatively to recent developments, with both the S&P 500 and Nasdaq 100 down from recent highs.
• Credit performed somewhat poorly during the previous rate surge. From September 15 through October 30 of last year, amid the rate moves, the investment grade index (Bloomberg U.S. Credit Index) sold off 12 basis points. Historically, the correlation between U.S. investment grade credit and U.S. 10-year treasury yields is negative, but it turned positive as credit and Treasuries sold off in tandem. Higher Treasury yields tend to draw more demand for investment grade credit, as all-in yields become more attractive, but the speed of the yield move tends to give pause to these buyers in the short term. The opportunity for a more attractive entry point when markets stabilize, combined with outflows (nearly $20 billion of outflows in Sep/Oct 2023), led to wider spreads. Recently, a similar pattern has begun to develop, with spreads already 6 basis points off the tights this month.
• Long-end and higher-quality credit had the best relative performance. The 11-25 year and 25 year+ buckets both outperformed the index by 10 basis points during the sell-off, whereas the 2-3 year and 3-4 year buckets were notable laggards. The long end remained well bid despite the broader risk-off sentiment, as investors locked in yields at or near the post-Great Financial Crisis highs. Lower-quality credit felt the most pain, as investors could lock in yields similar to those offered by higher-beta credits only a few weeks prior.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished March at 1.86% and 1.67%, respectively, up from 1.77% and 1.66% in February. 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 4/22/24.