Weekly Market Summary

Extra Credit^*

• After remaining stable for many years, the trade size in the investment-grade corporate bond market has materially fallen post-pandemic. Current estimates have shown a median ticket size decline from $500,000 in 2022 to $300,000 as of September 2024, which represents a 40% decline in percentage terms. This has occurred despite a substantial increase in total trading volume over the same period.
• The declining trade size is likely one of the symptoms of a secular shift in market structure. The pandemic acted as a catalyst for the adoption of new and more efficient technology, shifting more volumes to electronic trading and accelerating the rise of portfolio trades. The combination of these factors is changing the way market participants source liquidity.
• High-yield bond dedicated mutual funds and ETFs, which make up between 22-25% of investors in the asset class, saw the largest change from 2023, increasing share by 3%. High-yield dedicated mutual funds and ETFs now comprise nearly a quarter of the high-yield ownership base, making them now the largest owners of high-yield cash.
• This increase in mutual fund and ETF share in the high-yield bond market is not particularly surprising given the amount of retail money that has flowed into high-yield funds this year. Though there were some outflows early in the year as investors expressed a preference for loans, those outflows were reversed and then some over the summer. Spurred by expectations that the Federal Reserve interest-rate cutting cycle would finally begin in the fall, investors rotated out of floating-rate loans and into duration between June and September. As a result, net flows into high-yield retail funds now sit at over $15 billion year-to-date.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month both at 1.18% for high-yield bonds and 0.98% for bank loans, down and up from 1.40% and 1.16% 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 10/21/24.