Weekly Market Summary

Extra Credit^*

• High-yield spreads have whipsawed in recent months. In August, concerns of a carry-trade unwind drove spreads wider to over 380 basis points, and earlier in the month, a sharp rally in rates gave them room to decompress, gapping to 330 bps. They have since rallied to the range of 290-315 bps. However, movements have been uneven across ratings, with CCCs performing particularly well, bringing their option-adjusted spread inside of 700 bps for the first time since May 2022.

• CCCs have outperformed the Bloomberg US High Yield Index by over 400 basis points over the past three months. Historically, when CCCs outperformed through 3Q, they tended to continue outperforming through year-end.

• CCCs have outperformed on a year-to-date basis in 12 of the past 27 years (excluding 2024). Of those 12 years, CCCs continued their outperformance through year-end in seven instances, suggesting that risk-on momentum can persist for some time in lower-quality high yield.

• While the difficulty in precisely forecasting a CCC index-level spread can prove troublesome, it is only compounded by the fact that the high-yield buyer base rarely buys baskets of CCC bonds indiscriminately. But with that said, there is likely limited incremental upside in owning CCCs overall, but there are idiosyncratic opportunities in the market where active management can take advantage of for investors.

• 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 9/30/24.