Weekly Market Summary

Extra Credit^*

• The market has significantly reassessed the balance of risks from a hard landing to a no landing for the economy, reducing demand for safe havens and pushing term premium higher. One gauge of this is to check what probability markets are attaching to a hard landing (more than 250-basis-point cuts in a year) and to a no landing (more than a 25-basis-point hike in a year). In mid-September, the markets attached a 40% probability to the more aggressive scenario, which has since been pared back significantly as the economy remains resilient.
• The 10-year Treasury yield has risen a bit more than 100 basis points from the first Fed cut, which is quite unusual for the start of an easing cycle. This selloff has primarily been driven by real yields and, in turn, term premium, which has accounted for about 70% of the rise in nominal yields. This appears to have been driven by better-than-expected labor market data showing signs of stabilization, aggressive Fed action so far, and the outcome of the U.S. elections. All of this has reversed the course of flows from previous years with outflows now being seen in some long-term bond funds.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished December at 1.52% for high-yield bonds and 0.36% for bank loans, down and up from 1.54% and 0.34% in the month of November. 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 1/13/25.