Weekly Market Summary

Extra Credit^*

• A pickup in rate volatility and yields has added some bumps in the road for investment grade corporate bonds. In April, the widely followed MOVE index went from 86, its lowest level since the Fed lift-off in March 2022, to 121, its highest level since early January, as concerns about the Fed's ability to move ahead with rate cuts has worked back into market narratives.
• Typically, long-end industrials outperform amid rate volatility in investment grade corporate bonds. Although recently, investment grade corporate bonds have been reacting more to rates volatility than to equity volatility, looking at a 25-year history, VIX has mattered about twice more than MOVE for credit in indices. Within investment grade corporate bonds, 3–5-year financials and 1-10-year utilities are the most sensitive to rates volatility, while +10-year industrials are the least sensitive.
• High yield bonds and bank loans should remain tighter for longer amid sustained demand from buyers of all-in yield. Sticky inflation and the Fed's ultimate rate trajectory remain the key risks facing markets right now, with the chief concern being a move out of risk assets if long-end rates capitulate to higher-for-longer. Expectations are for one 25 basis point rate cut in 2024, down from the market estimate of six at the beginning of the year.
• The composition of the high yield index spread looks much different compared to the last time high yield spreads were inside of 300 basis points. Nearly all ratings buckets rated B and above are tighter compared to January 2022 when spreads were in this context. In addition, the high yield index is no longer the highest quality ever. BBs have decreased from 54% of the high yield index in 2020 to 47% currently, with single Bs claiming more of the share. The loan market has seen a similar deterioration in credit quality, with the B and below portion of the market growing from 22% at year-end 2019 to 32% currently.
• All of this in high yield has led to the lower quality portions of the market having an outsized effect on the absolute spread level. In high yield, the distressed segment of the index (+1,000 basis points) accounts for 22% of the index spread, despite the fact that the distressed percent of high yield par is 6.1%.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month at 1.32% and 1.55%, respectively, compared to 1.86% and 1.67% from March. The long-term historical default rate for loans and high yield bonds was 3.00% and 3.40%, respectively.

Sources: Bloomberg and JP Morgan as of 5/13/24.