Weekly Market Summary

Extra Credit^*

• Despite continued headlines about tariffs, fiscal spending cuts, and policy reform, investment-grade corporate bonds option-adjusted spreads remain tight. This has been bolstered by strong technicals and demand for all-in yield. On top of that, complacency has increased, as the upcoming conclusion to earnings season has seen markets lack an identifiable near-term catalyst to justify any potential concern for spreads to move out from current levels.
• High-yield spreads have remained tight to start the year, rallying from 287 basis points at year-end 2024 to 271 basis points as of Feb. 21. Investors are still active buyers of all-in yield, and inflows to retail funds have been robust to start the year (currently over $4 billion year-to-date). However, amid uncertainty about tariff implementations and the effects of DOGE on both government spending and public sector employment, investors appear to be expressing a preference for more defensive positioning. As a result, BBs have compressed a great deal toward BBBs.
• If you were to measure BB-BBB compression as a ratio rather than on an outright basis, BB/BBB decompression has already begun. As of Feb. 19, the ratio of BB spreads to intermediate BBB spreads was around the 34th percentile post-COVID. While not as stark as the absolute basis, the relationship is still at the tighter end of the range. That ratio has been fairly range-bound since 2023, which suggests that trading mean reversion of the BB/BBB relationship has been profitable.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the January at 1.50% for high-yield bonds and 0.30% for bank loans, down from 1.52% and 0.36% December. 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 2/24/25.