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Weekly Market Summary
Dec 16 to Dec 20, 2024
Extra Credit*
- For Investment Grade Corporate Bonds, all-in yields are expected to remain over 5% in 2025, as yield-focused investors should continue to provide a strong buyer base for the market. There is upside risk for demand from money market and equity rotation, but downside risk if yields fall too low for too long.
- After a year of incredibly strong demand, technicals continue to look robust and might even improve for investment grade corporate bonds in 2025. High all-in yields should continue to draw such buyers, which, led by foreign entities, have increased their share of market ownership. Furthermore, rotation from equities to fixed income after strong US stock outperformance from pension funds and rotation from money market funds into front-end investment grade corporates if the Treasury yield curve remains uninverted represent two potential powerful tailwinds for demand in 2025.
- Drive by robust CLO issuance next year, bank loans should continue to see strong demand as CLO issuance is expected to grow by roughly 4% next year. On a relative value basis, next year investors might favors loans over bonds, which should bolster demand from non-loan dedicated funds. Retail demand should remain strong as well amid loans' attractive income offering.
- After a steady increase in 2024, loan default rates are expected to decline next year and finish the year around their long-term average of 3%. Some of the key factors that might drive default rates lower are easier lending standards, lower maturity walls, and continued rate cuts, which should curtail fundamental deterioration.
- Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished October at 1.54% for high-yield bonds and 0.34% for bank loans, up and down from 1.30% and 0.55% in the month prior. 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 12/16/24.
Previous reports
*Source: Morningstar®, Bloomberg, Credit Suisse. OAS is Options Adjusted Spread. 4-year discount margin is used for spread for bank loans. Yield quoted is yield-to-worst or equivalent calculation. YTD Low / High for yields are based on end of week and not intraday movements. Indexes and sub-indexes: Investment-grade corporates represented by Bloomberg US Corporate Bond Index. High-yield bonds represented by Bloomberg US Corporate High Yield Index. Bank loans represented by Credit Suisse Leverage Loan Index. The red and green arrows depicted under Yields, Option Adjusted Spreads, and Prices indicate a higher or lower value from the previous week.
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