Weekly Market Summary

Extra Credit^*

• EBITDA margins remain at record highs on an aggregate level, driven by higher-quality credits. On an aggregated basis, non-financial investment-grade issuer margins remained steady quarter-over-quarter at 30.1%. Recent EBITDA margin improvement has been attributed to higher-quality issuers, and the divergence between single As and BBBs continued in the first quarter. Single As climbed 0.2 percentage point quarter-over-quarter, for a 1.7 percentage-point climb year-over-year, to reach record highs of 31.7%, while BBB margins have fallen 0.3 percentage point quarter-over-quarter and 0.2 percentage point year-over-year. AA rated debt, although a small portion of the universe, also reached record highs in the first quarter, improving by 0.4 percentage point quarter-over-quarter and 1.6 percentage points year-over year to reach 26.3%.
• More portfolio trading activity is contributing to volume shocks in corporate bonds. Portfolio trading activity has been higher on days with a net trading shock, while block trading has been lower. Taken together, these results suggest that portfolio trading, and likely electronic trading as a whole, have increased the velocity and efficiency of the corporate-bond market. In the past, when block trades were the most viable alternative to move large amounts of corporate-bond risk, the pace was slower, but this also meant that shocks were distributed over the course of a few days.
• Liquidity in the investment-grade corporate-bond market, by certain measures such as turnover, is not materially different than in past years, despite anecdotal evidence from investors that risk has been fairly easy to move.
• After four straight quarters of broad deterioration, the fundamental health of the Bloomberg Corporate High-Yield Index appeared to level off in the first quarter. Net leverage improved materially, dropping from 5.3x in 4Q23 to 5.1x in 1Q24. This puts the net leverage of the index near its lowest level in the past decade.
• Interest coverage deteriorated for the fifth straight quarter, however, falling from 4.6x to 4.5x. While this is not surprising as companies continue to grapple with the elevated cost of financing associated with higher-for-longer rates (especially companies that also issue floating-rate debt, which compose roughly 40% of the Bloomberg Corporate High-Yield Index par), the rate of decline appears to be slowing.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished May both at 1.25%, respectively. This was compared to 1.32% and 1.55% from April, as the high yield default rate were 30 basis points lower and the loan default rate now sit at a 16-month low. The long-term historical default rate for loans and high yield bonds was 3.0% and 3.4%, respectively.

Sources: Bloomberg and JP Morgan as of 6/17/24.