Corporate Credit Highlights

• J.P. Morgan Strategy on investment-grade (IG) flows in December: “High-grade (or investment-grade) bond funds recorded inflows every month last year for a total of $378 billion of inflows. This is a new all-time nominal record, ahead of the $347 billion of inflows garnered in 2017 (though not a record on a percentage-of-starting-AUM (assets under management) basis, given the 1.8x growth in AUM since then). This was also well above the $189 billion of inflows in 2023 and average inflows of $319 billion per year in 2019-2021.The vast majority of the inflows went towards Bloomberg US Aggregate Bond Index (Agg) funds (60%), followed by total return funds (25%) with just 15% going into corporate-only products, which includes most of the popular high-grade exchange-traded fund (ETFs). On a percentage of starting AUM basis though, total return funds were ahead with inflows equivalent to 13.5% of AUM. Overall, inflows to high grade were equivalent to 10.4% of starting AUM in 2024, which compares favorably to high yield (6.6%), municipal bonds (4.3%) and equities (3.1%), but lagged money markets (11.8%) and leveraged loans (18.6%).” ¹
• J.P. Morgan Stanley 2024 IG performance recap: “IG spreads ended the year 19 basis points tighter on the index at 80 basis points. Lower-quality credit outperformed, with BBBs posting 3.1% in excess returns vs. single-As at 2.0%. The belly of the IG curve outperformed significantly, with the 7 to 10 year-plus spreads tightening the most by 25 basis points. Financials compressed sharply vs. non-financials, with the basis narrowing by 17 basis points on the year.” ²

• J.P. Morgan Strategy on 2024 loan and high-yield (HY) performance recap: “Bank loans outperformed high yield in 2024, generating 9.0% total returns vs. 8.2% for HY. Within HY, a CCC rally in the second half of 2024 led returns, with the CCC and lower cohort posting 18.2% in total returns. Total returns for BBs and single-Bs tracked 6.3% and 7.4%, respectively. For bank loans, single-Bs led returns, posting 9.6% total returns for 2024, while BBs posted 8.2% and CCCs posted 9.0%.” ³
• J.P. Morgan Strategy on loan supply outlook: “We expect a pickup in loan issuance in 2025, bringing supply and demand to a better balance. For 2025, we forecast HY gross issuance of $400 billion (~35% year-over-year) and institutional loan supply of $600 billion (+17% year-over-year). Across HY and bank loans, the increase in gross supply is driven by continued strong refinancing activity and a notable rebound in deal activity. In particular, the loan supply forecast splits into $280 billion (~7% year-over-year) refinancing (excluding repricing) and $320 billion (~28% year-over-year) new money creation. We expect deal activity to remain light in the near term and to pick up more materially in the second half of 2025.” ⁴

• J.P. Morgan on 2024 high-yield (HY) flows: “Retail demand for high-yield bonds rebounded strongly in 2024 amid resilient economic growth, a Federal Reserve easing cycle, strong capital market conditions, low defaults, elevated yields, and extremely tight spreads across fixed-income markets. Specifically, inflows for HY funds totaling $20.0 billion in 2024 (including $10.6 billion for ETFs) equate to 6% of AUM and recoup a portion of the $68 billion of withdrawals between 2021 and 2023. Peaking in the third quarter of 2024 at $10 billion, HY funds have now reported inflows in 12 of the past 13 months. As such, AUM ($359 billion or 14% year-to-date) has risen to a three-year high and is only 4% off the historic peak at yearend 2021. And HY mutual funds now account for 27% of the U.S. HY market. As well, HY ETF AUM has risen 23% year-to-date to a record high of $91.2 billion, which accounts for 7% of the outstanding HY base.” ⁵
• The RBC Wealth Management trade desk on HY valuations: “While HY sits now ~30 basis points off the tights of the year at +282, the OAS (option-adjusted spread) is still through the general range of +290 to +320 established through the middle of the year. With the 10-year Treasury also backing up to +4.50, overall yields in HY of 7.44% continue to attract many to the asset class. Conversations with our client base point to a largely constructive outlook for credit in 2025, with the most repeated concern being a revival of inflation.” ⁶
• JP Morgan Strategy on rising stars/fallen angels: “In 2024, the ratio of rising stars to fallen angels is strong at a 5:1 ratio. However, in dollar terms, there were just $18 billion of index eligible rising stars and $4 billion of fallen angels, the lightest volume in several years. Net rating changes as a percent of the high grade market is at 5.9%, which is still high but down from 2023 at 7.9%, as ratings actions have slowed even within high-grade. Looking to 2025, we forecast $54 billion (of which $17 billion is index eligible) of debt to be upgraded from HY to HG (rising stars) and $34 billion (of which $25 billion is index eligible) of debt to fall from HG to HY (fallen angels).” ⁷
  

Definitions
‍

• 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 IG curve refers to the middle section of a yield curve for investment-grade (IG) bonds.
• The Bloomberg US Aggregate Bond Index (Agg) is composed of investment-grade U.S. government bonds, investment-grade corporate bonds, mortgage pass-through securities, and asset-backed securities, and is commonly used to track the performance of U.S. investment-grade bonds.
• The Bloomberg U.S. Corporate High Yield Bond Index (High Yield) measures the USD-denominated, high-yield, fixed-rate corporate bond market.
• 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.
• 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.
• 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.
• The Credit Suisse Leveraged Loan Index (Bank Loans) is designed to mirror the investable universe of the U.S. senior secure-credit (leveraged-loan) market.
• A financial easing cycle refers to a period where a central bank, like the Federal Reserve, lowers interest rates to stimulate economic activity by making borrowing cheaper, encouraging investment, and supporting consumer spending.
• An exchange-traded fund (ETF) isa type of pooled investment security that operates much like a mutual fund.
• Fallen Angel isa term to describe bonds that at one time were considered investment grade and now are categorized as junk due to a reduction in the issuer’s credit rating.
• High-yield bonds (or junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds.
• Index eligible refers to securities held in the index.
• 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 isa 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.
• An institutional loan isa non-federal financial aid provided by the borrower’s school.
• 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).
• 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.
• The money market refers to trading in very short-term debt investments. It is characterized by a high degree of safety and relatively low rates of return on investment.  
• Municipal bonds are debt securities issued by state, city, and county governments to help cover their spending needs.
• Option adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return.
• 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.
• 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 worst (YTW) estimates the lowest possible return on a bond without the issuer defaulting.