Weekly Market Summary

Extra Credit^*

• The Bloomberg US Aggregate Bond Index (Agg) has continued to struggle to offset the gains investors experienced in 2022, as returns for the Agg since then sit at -3.64% (as of 6/30/24). On the other hand, bank loans have not only wiped out losses from 2022 but have basically kept pace with equities. Bank loans have returned 6.63% vs. 7.29% for the S&P 500 Index and 5.16% for the Dow Jones Industrial Average since the start of 2022 with defaults coming in below long-term averages. With “higher for longer” expectations for interest rates, loans may continue to be an attractive fixed-income alternative for investors for the rest of 2024 and 2025.
• While investors have sought safety in duration, short-term investment-grade corporate bonds have historically done well when the 10-year/2-year U.S. Treasury curve has been inverted. As the curve continues to set length-of-time records for being inverted, short-term investment-grade corporate bonds have been outperforming all other investment-grade segments of the fixed-income market. Historically, when the cumulative return of the curve has been inverted for at least 100 days, short-term investment-grade corporate bonds have averaged 6.70% vs. 3.50% returns for broad investment-grade bonds.
• Given the June inflation data along with a gradual cooling of the labor market, expectations have been shifting in regard to potential rates cuts for 2024 and 2025. Barclays recently update its expectations for the Federal Reserve and moved predictions for the number of rate cuts for 2024 to two with the first coming in September and the second in December. This pace would bring the fed funds target range to 4.75-5.00% by the end of this year. For 2025, Barclays expects the Fed will cut three times (instead of the previously predicted four) in March, June, and September. In all, the target range for the end of 2025 remained unchanged at 4.00-4.25%.
• This past week brought the Bank of Japan's latest Sakura report, which revealed that all regions of Japan—other than the one impacted by the Noto peninsula earthquake—were either picking up or recovering. The main focus in relation to the Bank of Japan’s policy management is its perception of wage- and price-setting trends at smaller companies. Here the Bank of Japan noted the spread of wage hikes that either exceeded or were on a par with the previous year’s large increase as well as the pass-through of such labor costs to prices, indicating that even among smaller firms a vicious cycle between wages and inflation is underway. All of which could warrant Bank of Japan action that is counter to what is taking place here in the U.S.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month both at 1.17% for high-yield bonds and 1.09% for bank loans, both down from 1.25% 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 7/15/24.