Weekly Market Summary

Extra Credit^*

• The recent Chinese stimulus has had positive implications for U.S. credit. Excess spread for exposure to China has been range-bound at 0-2 basis points for every 10% of revenue exposure. Furthermore, only companies fully reliant on China trade at a discount. The most exposed tickers have outperformed the market, as companies with more than 75% of revenues coming from China (essentially Chinese names with USD debt) have outperformed the index by 5 basis points over the past few weeks.

• The metals, tech, and autos sectors have the most exposure to China. A large portion of tech hardware and semiconductor sales booked in China are eventually exported to other countries, which mitigates some China exposure for the sector.

• As the largest consumer of commodities, growth in China's economy has a well-established relationship with metals pricing and has historically driven credit spreads tighter. While metals prices have reacted to China's announcement and forward EBITDA/FCF estimates are likely to adjust upward over time, expectations are for a limited effect on credit spreads in the current environment. The investment-grade metals sector has significantly upgraded credit quality following several years of debt repayment.

• Markets are aggressively pricing in rate cuts, and high-yield bond yields have tightened substantially as a result. The moves have been so pronounced that bank loans are now looking more attractive than bonds on a relative yield basis, even considering the seven to eight cuts priced in by the forward curve.

• Relative value changes swiftly, however. Now, given how sharply the high-yield bond yield-to-worst has fallen amid the rate rally, the entry levels for high yield are looking less attractive, as the Treasury curve has already priced in further Fed easing. On a spot basis, bank loans are outyielding bonds by over 250 basis points. But even on a forward-curve adjusted basis, loans are outyielding bonds by over 80 basis points, the widest margin since 2022.

• 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 10/07/24.