Weekly Market Summary

Extra Credit^*

• Bonds have gotten a substantial head start over bank loans so far this year. The Bloomberg US Corporate High-Yield Index has outperformed the Morningstar LSTA Leveraged Loan Index by over 100 basis points in 2025, with total returns of 1.76% and 0.74% (as of 3/7/25), respectively. Driving this has been a substantial rally in rates, with the 5-year Treasury over 50 basis points lower from the January highs, as risk-off sentiment and uncertainty about tariffs/DOGE (Department of Government Efficiency) have spurred a flight to quality. This rate move has more than offset the widening in high-yield option-adjusted spreads and have brought to question investors’ allocation to bank loans.
• While some investors may be considering swaps from bank loans to bonds, it is necessary to consider the differences in risk profiles of the respective markets. The leveraged loan market is a single B heavy market, with over 60% of par in that ratings segment. High yield, conversely, has a much higher-quality skew, with roughly 50% of index par concentrated in BBs. However, the yield opportunity in high-yield bonds can sometimes be misleading, as there is more CCC paper in the high-yield market than in the loan market today.
• Market expectation of rate cuts has increased amid concerns about slowing growth – the probability of three cuts in 2025 has increased from 18% to 33% over the past month, while the probability of four cuts has risen from 6% to 25%, per the CME Fedwatch Tool (a tool used to analyze the probability of FOMC rate moves for upcoming meetings) as of March 10, 2025.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished February at 1.26% for high-yield bonds and 0.27% for bank loans, down from 1.50% and 0.30% in January. 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 3/10/25.