Weekly Market Summary

Extra Credit^*

• Overall, during Q2 24, U.S. investment-grade credit (excluding financials) fundamentals remained unchanged quarter-over-quarter based on an average five-year rolling z-score of net debt/EBITDA, interest coverage, EBITDA margin, and quick ratio. EBITDA margins reached all-time highs, and interest coverage saw slight improvement on a quarter-over-quarter basis but were offset by an increase in leverage across the universe.

• In investment-grade corporate bonds, net leverage for the Bloomberg US Corp Investment Grade Index based on market value-weighted net debt/EBITDA is at 3x, up 0.1 quarter-over-quarter and 0.2 year-over-year. The sector with the biggest increase in net leverage quarter-over-quarter was capital goods, which was driven almost single handedly by Boeing. The sectors with the biggest reductions in net leverage quarter-over-quarter were tech (-0.1x) and communications (-0.1x).

• High-yield mutual funds underperformed the Bloomberg US Corporate High Yield Index over the summer, likely due to being overweight loans. That may be changing now, however, as loan funds have started to have large outflows and high-yield funds are receiving inflows as retail investors rotate into duration. High-yield retail funds underperformed the index in July and August but had outperformed earlier in the year. Total year-to-date mutual fund returns sit at 6.3%, which is par with the index.

• Rates have rallied sharply over the past several weeks, with the 10-year Treasury approximately 70 basis points lower since July 1. As a result, fixed-rate assets have outperformed those with floating rates, leading loans' total returns—which had been higher than high yield for nearly all of the first half of the year—to fall beneath those of the high-yield index across nearly each segment of the market. Still, the compression has not been equal across ratings, with CCC bonds materially outperforming their loan counterparts by close to 5.8% over the two months ending August. While these are large swings, the CCC portion of the loan market remains much smaller than that of high yield at 6.6% and 12.7%, respectively.

• 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.

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Sources: Bloomberg and JP Morgan as of 9/9/24.