Weekly Market Summary

Extra Credit^*

• With greater confidence in the downward trajectory of inflation, interest rates have rallied swiftly over the past few months, with the 10-year Treasury roughly 80 basis points lower since May. In light of the rate rally, spreads have widened, with the Bloomberg US High Yield Index spread reaching 330 basis points on Sept. 10, its widest since February, excluding August's “carry trade unwind” fears.

• Without any obvious catalyst between now and the election for option-adjusted spreads to gap wider, the demand for all-in yield will potentially lead any selloff in rates to be met with buyers of high-yield paper, keeping spreads tighter until there is greater certainty on the outcome of the presidential election. Therefore, expectations are for high-yield spreads to trade back to a 290-315 bps range over the next several weeks.

• Flows into bond funds have held steady, though investors rotated out of U.S. Treasury funds and into broader fixed-income funds amid anticipation of the Fed rate cut last week. Japanese investor demand picked back up after a brief slowdown. Meanwhile, bank demand was again tepid.

• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month at 1.18% for high-yield bonds and 0.98% for bank loans, down and up from 1.40% and 1.16%, in August. 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 9/27/24.