Weekly Market Summary

Extra Credit^*

• Positive rating momentum continued in 3Q23 with upgrades exceeding downgrades by 2.3x. $100 billion of investment grade bonds were upgraded while $44 billion were downgraded in the quarter. Of the $100 billion, $99 billion were upgraded within investment grade and $1 billion migrated from high yield to investment grade. Conversely, $41 billion of downgrades occurred within investment grade while $3 billion of bonds fell to high.
• Year to date, total upgrades stand at $737 billion ($693 billion within investment grade + $45 billion of Rising Stars), while downgrades total $205 billion ($188 billion within investment grade + $17 billion of Fallen Angels). The upward ratings momentum is losing a little steam with the upgrade/downgrade ratio at 3.6x versus 3.9x in FY22.
• The relationship between defaults and recovery rates is particularly unusual in this cycle, particularly for unsecured bonds. Their recovery rates have fallen in nearly a straight line fashion, despite default rates for the senior unsecured cohort remaining relative range-bound. First-lien loan recoveries, however, have trended more in line with what the longer-term relationship with default rates would imply. Still, recoveries for both senior unsecured bonds and first-lien loans sit meaningfully below their medians since 2001 at 26% (vs. median since 2001 of 42%) and 58% (vs. 65%), respectively. 
• The precipitous decline in recoveries for secured and unsecured bonds is also concerning in light of the growing proportion of the high yield bond index that is secured — now above 30% of index notional. The evolution has been particularly stark for single Bs, for which nearly half are secured, up from <20% as little as five years ago. This trend has been spurred in large part because of year-to-date issuance, where 60% of supply has been secured, well above the 2010-19 annual average of 23%. 
• The trailing 12-month default rates for bank loans and high-yield bonds, excluding distressed exchanges, finished the month at 1.90% and 1.32%, respectively, down from 2.24% and marginally higher from 1.29% from August. The long-term historical default rate for loans and high yield bonds is 3.1% and 3.2%, respectively.

Sources: Bloomberg and JP Morgan as of 10/9/23.