Weekly Market Summary

Extra Credit^*

• The Treasury plans to end this year with a $750 billion cash balance. Given its now-larger projected financing needs, the market could see bill issuance increase another $940 billion through December. These projections suggest that the bill market will grow to 21.5% of outstanding debt by December, up from 15.5% in 2022. Despite heavy issuance, bill auction demand remains robust, with most maturities close to three times oversubscribed. Bid-to-cover ratios match or exceed their 2022 averages. We suspect that non-money fund demand for bills has increased, as yields are higher than what government-only funds or bank deposits pay. This demand, however, appears to be concentrated in shorter maturities.
• Investors have seen the 30-year and 40-year investment-grade credit curves steepen recently, and they are now near the steepest levels of 2023 and in the 75^th percentile of the range since 2021. When it comes to option-adjusted spread per unit of duration (SPUD), this has also reached historical levels, and the SPUD has elevated to 17 basis points when it comes to the delta between 30-year and 40-year credits (this is well above the 5-basis-points average since 2017. Also of note, 40-year debt has become a larger portion of the index, potentially creating more opportunities for investors. Market value for this end of the curve has risen over the past few years to 2.5% of the investment grade corporate bonds becoming a potential viable spot for investors to find attractive yield opportunities. 
• The past few months have been favorable for credit spreads and risk assets, as the dual banking crises in March seem to have largely faded into memory. CCC high yield bonds have particularly outperformed since the year-to-date wides in March, as CCCs have rallied more than 200 basis points and the highly distressed cohort (bonds rated CC and C) have rallied more than 2,000 basis points. Although the rally in distressed credits appears dramatic, the change in outright spreads has been exaggerated by defaulted names leaving the index. Translated into returns, the CCC cohort has returned 10.9% year-to-date, and similarly, the CC/C cohort has returned 11.7%.
• The trailing 12-month default rates for bank loans and high-yield bonds, excluding distressed exchanges, finished July at 2.33% and 1.18%, respectively, up from 2.41% and 1.64% in June. 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 8/7/23.