Corporate Credit Highlights

• TD Securities Strategy on active vs. passive credit investing: “The share of passively managed U.S. investment-grade bond funds and ETF assets was relatively stable for most of 2024 around the most recent level of 41.3%, but well below the peak of 42.6% from January 2024. In high yield not surprisingly, the share of passively managed bond fund and ETF assets under management is much lower at 20.1% and consolidating around that level in recent months. The share of passively managed loan funds and ETFs obviously is even much lower at 5.7% and has not shown an upward trend in recent years. It is fair to assume that the shares of passively managed investment-grade and high-yield bond funds will at some point resume their increases but not to the extent seen for stocks where the share of passively managed. But the value of active management will always be greater in credit on much less liquidity in credit relative to equities as well as the relative shapes of the return distributions.” ¹
• BAML Strategy updating its total-return forecast post rate forecast update: “Our rates strategists have updated their rate forecast higher in 2025 for the U.S. and Europe. For the U.S., the fresh forecast calls for rates to remain little changed from the current levels (4.75% on the 10-year Treasury by yearend). That implies a relatively attractive 5.2% total return for investment-grade over the next 12 months, up from 2.8% last year and similar to the current 5.5% index yield. The return would be consistent with history. Excluding the financial crisis, yields between 5 and 6% led to a return of about 5.7% over the next 12 months, on average. Returns over the next three years tend to follow the starting yield even more closely. Finally, the 5.5% yield results in a sizable 0.9% break-even (parallel) yield rise over the next 12 months. In other words, the total return should remain positive over the next 12 months should 10-year Treasury remain below 5.7%. Our forecast assumes a moderate spread widening to 90 basis points over the next 12 months from the current index level of 84 basis points. That implies a modest 59 basis points excess return over the next 12 months, led by the belly (98 basis points for the 5-to-7-year maturity range). Total returns are expected to be much flatter across the curve, peaking at 5.9% for the 7-to-10-year maturity.” ²
• Goldman Sachs Strategy expecting elevated IG supply to persist: “Month to date, U.S. investment-grade supply is running slightly ahead of last year’s pace, totaling over $164 billion through Jan. 22 compared to $162 billion at the same time last year. We continue to forecast full-year total gross U.S. investment-grade supply of $1,750 billion, which would be up roughly 5% from last year’s total of $1,664 billion and above the Bloomberg consensus forecast of $1.5 trillion. Four reasons underpin our upbeat view on activity in the U.S. investment-grade primary market. First, and most importantly, we think the environment for large-scale mergers-and-acquisitions deals is probably the best it has been in several years when weighing the regulatory and macroeconomic landscape. This is often the X-factor that drives gross investment-grade supply at the margin. Second, our economists are still forecasting above-trend real U.S. GDP growth of 2.6% this year (vs. consensus forecasts of just 2.1%). Third, there is still about $1.9 trillion set to mature in the U.S. investment-grade market over the next two years, which should keep the up flow from a pure refinancing perspective, as was the case last year. Finally, risk appetite remains firm for U.S. investment-grade bonds evidenced by low new issue concessions, near-record low spreads, strong mutual fund inflows, and continued net foreign demand.” ³

• JPM Strategy on private credit growth: “$293 billion of private credit volume in 2024 represented a considerable 100% increase year-over-year versus $146 billion in 2023. Note $88 billion of LBO (leverage buyout) direct lending volume in 2024 outpaced syndicated markets ($62 billion B&L or building-and-loan associations). Meanwhile, the median coupon for private credit deals in December increased 25 basis points month-over-month to SOFR plus 525 basis points (-75 basis points year-over-year), the OID (original issue discount) was $98.50 (flat month-over-month), while the median YTM (yield to maturity) decreased 12 basis points to 10.4%. Pricing has now stabilized over the past seven months at SOFR plus 500 to 525 basis points, perhaps an indication a floor has been reached. And the gap between B- loans and newly originated private credit deals of 125 basis points is wide to the 100-basis-point average gap since 2022. Notably, increased competition between private and syndicated markets in 2024 fueled $34.2 billion of BSL (broadly syndicated loans) deals refinanced into private credit and $34.7 billion of direct into syndicated loans.  While leveraged loans outstanding stabilized in 2024 ($15 billion), the issuer count declined (-95), which translates into growth in the average leveraged loan issuer size.” ⁴
• Barclays Strategy on CLO ETF flows: “Flows have been consistently positive since inception as the market is still nascent and growing. Momentum remains positive, with the first two weeks of 2025 having seen record inflows. However, concerns around the stickiness of retail money have also been raised. That said, CLO ETFs have only seen one week of weekly outflows since inception (the week ending Aug. 8, 2024), and the two mezzanine CLOs we tracked in 2024 have seen two weeks of outflows so far. On the other hand, the comparable U.S. broadly syndicated leveraged loans (BSLs), which are also floating-rate fixed-income products, have sustained periods of outflows. As our leveraged-loan strategists have rightly pointed out, the Lipper fund flow data for BSLs include CLO ETFs and appear to be boosting BSL flows. Stripping out the CLO ETFs flows, we find that the loan fund flows are more benign, but also that CLO ETF flows outstripped flows into BSLs in 2024. In the report, our leveraged-loan strategists discuss the sensitivity of flows into BSL and note that as rates rise and cause a negative total return for high-yield investors, it is possible that retail investors shift allocations from high yield and into loans.” ⁵

• BAML Strategy on the high-yield correlation to other asset classes: “High yield has evolved into an exceptionally rate-sensitive, investment-grade-like market, with many bonds trading inside 200-basis-point spreads, resulting in an all-time high 70% correlation to investment grade. That tight connection is rooted in structural factors, such as a shift toward larger- and higher-quality issuers, substantial institutional ownership, and deeper liquidity. Temporary factors such as high rates and tight spreads are also contributing. Remarkably, even the record-low high-yield duration is not enough to offset the strength of those other factors. By contrast, the high-yield/broadly syndicated loans (BSL) correlation has practically disintegrated, sinking from a typical 70-to-90% range to barely 20%. This departure is both striking and revealing: high-yield rate sensitivity has little in common with BSL's more stable floating-rate profile, while the divergence in issuer quality has widened. Again, even the record-low high-yield duration at just three years is not enough to neutralize the diverging quality and ownership trends. High-yield sensitivity to equities has softened, but still remains at a solid 60%, driven by rates, tech leadership in stocks, and a record high proportion of private issuers in high-yield. In the meantime, our past sensitivity to oil was an artifact of the shale revolution, not likely to fully repeat itself. And as always, we remain negatively correlated to the greenback, which means fewer foreigners to be buying when it strengthens, as is the case today.” ⁶

Definitions
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• Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor.
• Assets under management (AUM) is the total market value of the investments managed by a person or entity on behalf of investors.
• Bank loans (also known as floating-rate loans or leveraged loans) invest in bonds and other fixed-income securities that have variable, as opposed to fixed, interest rates.
• A basis point is one hundredth of a percent, so 100 basis points is equivalent to 1%.
• The belly of the yield curve refers to the middle section of a yield curve, representing the intermediate maturities of bonds, typically ranging from a few years to a decade, where investors can potentially find a balance between short-term and long-term interest rate risks while seeking solid returns. A yield curve plots the interest rates of bonds that have equal credit quality but different maturity dates.
• A bond isa fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.
• Broadly syndicated loans (BSLs) are the most common form of leveraged bank loans and are supported by cash flows to finance mergers, acquisitions, and recapitalizations.
• A collateralized loan obligation (CLO) is a single security backed by a pool of loans, collected into a marketable instrument via process known as securitization.
• A concession isa selling group's compensation in a stock or bond underwriting agreement.
• A corporate bond isa debt security that is issued by a company to raise capital.
• A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity.
• The credit market refers to the marketplace through which companies and governments issue debt to investors in exchange for regular interest payments.
• Credit rating or quality are grades given to bonds that indicate their credit quality as determined by private independent rating services such as Standard & Poor's, Moody's and Fitch. These firms evaluate a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from “AAA,” which is the highest grade, to “D.”
• A credit rating upgrade is when a credit rating agency changes a debt issue's rating from lower to higher. This indicates that the agency believes the company's financial position and business prospects have improved, making it less risky.
• Direct lending isa form of corporate debt provision in which lenders other than banks make loans to companies without intermediaries.
• Duration is often used to measure a bond’s or fund’s sensitivity to interest rates. The longer a fund’s duration, the more sensitive it is to interest-rate risk. The shorter a fund’s duration, the less sensitive it is to interest-rate risk.
• Excess return is identified by subtracting the return of one investment from the total return percentage achieved in another investment.
• An exchange-traded fund (ETF) isa type of pooled investment security that operates much like a mutual fund.
• The Global Financial Crisis (GFC)refers to the period of extreme stress in global financial markets and banking systems between mid-2007 and early 2009.
• ‍Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. The GDP growth rate compares the year-over-year (or quarterly) change in a country's economic output to measure how fast an economy is growing.
• High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• The ICE BofA US Corporate Index isa benchmark index that tracks the performance of investment grade corporate debt in the United States.
• Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody’s.
• An issue or issuance is a process of offering securities in order to raise funds from investors. Companies may issue bonds or stocks to investors as a method of financing the business.
• Leverage refers to using debt (borrowed funds) to amplify returns from an investment. A leveraged loan is a type of loan made to borrowers who already have high levels of debt and/or a low credit rating. Lenders consider leveraged loans to have an above-average risk that the borrower will be unable to pay back the loan (also known as the risk of default).
• A leveraged buyout (LBO) isa type of acquisition in the business world whereby the vast majority of the cost of buying a company is financed by borrowed funds.
• Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.
• Maturity (or maturity wall) is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist.
• Option adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return.
• An original issue discount (OID) is the amount of discount or the difference between the original face value and the price paid for the bond.
• Passive investing is an investment strategy that aims to maximize returns in large part by minimizing the costs of buying and selling securities. Index investing is one common passive investing strategy.
• ‍Private credit investing is much like buying a bond, with the main difference being that private credit isn't traded on the public markets.
• A refinance refers to the process of revising and replacing the terms of an existing credit agreement, usually as it relates to a loan or mortgage.
• Rising stars are bonds that were considered speculation grade when issued but have since improved their financials, reducing the risk of default.
• A refinance, or refi, refers to revising and replacing the terms of an existing credit agreement.
• Repricing is a change in the market environment that allows for a reassessment of the value of an investment.
• A return distribution isa pattern of returns from a portfolio or asset over time.
• ‍‍Secured Overnight Financing Rate(SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
• A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers.
• Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, represented by Treasury bonds. Spread income refers to the additional income from this difference.
• The 10-year treasury bond yield is the interest rate the U.S. government pays to borrow money for a decade, serving as a benchmark for other interest rates and a key indicator of investor sentiment about economic conditions.
• Yield isa measure of the profit that an investor will be paid for investing in a stock or a bond. It is usually computed on an annual basis.
• Yield to maturity (YTM) indicates the total expected return of a bond over its lifespan, taking into account compounding and reinvested interest.
• Yield to worst (YTW) estimates the lowest possible return on a bond without the issuer defaulting.