Weekly Market Summary

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• Investment-grade corporate bonds have benefited from ongoing buying from Taiwan, which has been steady for most of this year even though higher FX hedge costs are affecting net yields. Buying has been focused on single As and credits with steep curves. More recently, those with more support from Taiwan have experienced less curve steepening.
• Recent declines in yields have driven concerns about demand. Over the past two years, there has been an increasing focus on the effects of yield-focused buyers due to the higher-rate environment. With the recent moves in Treasury yields, all-in yields for the investment-grade universe have plummeted to 4.94%, the lowest level in a year and 60 basis points lower than the past 12-month average.
• Overseas investors are among the largest bases for yield-focused buying. Given that they typically buy to hold, foreign investors tend to focus on yields with less concern about spread levels. Current lower yields naturally raise the question of how overseas buyers' behavior will evolve.
• Bloomberg US Corporate High Yield Index duration has fallen to all-time lows as issuers keep bonds outstanding for longer, and convexity is negative even though most of the index is trading at a discount to par. High-quality bonds with positive convexity might be more attractive with rate cuts on the horizon, as many investors continue to look to add fixed income to their portfolios.
• Some of the shortening in duration in high-yield bonds is explained by the higher-yield environment of the past couple of years, which has put downward pressure on bond prices, thereby reducing duration. However, the average Bloomberg US Corporate High Yield Index price has increased in the past 10 months from $86.10 in October 2023 to $94.60 now. Still, despite the recent rally in prices, index duration has decreased over the same timeframe, suggesting the decline in the time-to-maturity is the dominant driver of the recent fall in duration.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished July at 1.16% for high-yield bonds and 1.40% for bank loans, down and up from 1.17% and 1.09%, respectively, in June. This is also well below the long-term historical default rate of 3% for loans and 3.4% for high yield, and the historical post-GFC default rates of 2.3% and 2.5%, respectively.

Sources: Bloomberg and JP Morgan as of 8/19/24.