IG and HY Bond Spreads Trends

Market Outlook for Credit: Macro & Fed Policy: - Markets await Powell’s Jackson Hole speech today, a lot of Fed speak that will disappoint markets since he will not likely commit to lowering rates, maintain optionality - Economic growth has slowed (1.2% GDP from 2.4% GDP last year); however, recession risk is very low - Job growth has slowed to 35k monthly average, below the Fed’s full employment objective - CPI remains sticky/elevated (2.75%), but prices are relatively stable along this trend line - Fed Funds too high; higher front-end rate has distorted the yield curve -> V-shaped yield curve is abnormal (4.35% SOFR -- 4.2% T-bills -- 3.75% 2-year UST -- 4.3% 10-year UST) - Market is pricing in 90%+ odds of Fed ease by 25 bps at the September 17th meeting, yet Powell is 50-50% on cutting rates, as he is searching for confirmation of slowing inflation Public & Private Credit: - IG spreads at +75bps, tightest since 1990’s, trading in 0-percentile of spreads - Credit story remains strong: easy financial conditions, solid earnings, improving balance sheets, low recession risk - With IG spreads compressed, HY spreads relatively tight with an OAS of + 285bps - Private credit offers strong risk-reward with higher relative IRR/MOIC compared to public credit markets - Capital allocators will continue to build exposure to credit, both in the public and private markets - IPOs and M&A are picking up with PE sponsors actively perusing exits and new deployment - ABL allows capital allocators to diversify PC exposure with a low correlation coefficient for ABL providing diversification to DL and public credit sectors - Opportunistic credit defined by capital solutions and special situations represents the third leg of the private credit stool with debt that delivers equity-like returns that equates to +200-300bps vs. DL and ABL Take-a-ways: Amid Fed easing and tight public market credit spreads, private credit offers superior risk-adjusted returns including DL, ABL and Opportunistic. The Fed easing cycle should prove beneficial for the economy and the credit markets. 

Fixed Income: What’s Hot, What’s Not, and What’s Just Plain Expensive Markets love a good narrative, but right now, the fixed income story is all about finding value in a world of tight spreads and shifting central bank expectations. So, where do we stand? 🔹 US Treasuries: Neutral. Our economists see no Fed cuts this year, with just a 25bp cut in 2026. Yields are drifting lower, but with growth slowing, opportunities for duration trades may be short-lived. 🔹 DM Investment Grade (IG): Overweight. When rates start to move lower, longer-duration IG credits should benefit. But with spreads tight, we prefer higher-quality credits (single-A and above) to protect against any downside surprises. 🔹 DM High Yield (HY): Neutral. Valuations look stretched for lower-rated names, but spreads are showing early signs of widening. We’re staying selective—short-dated BBs make sense for carry, but we’re not chasing risk here. 🔹 Asia IG: Overweight. The premium over global peers makes it hard to ignore, with Malaysia/India/Indonesia quasi-sovereigns offering a sweet spot of yield and stability. 🔹 Asia HY: Overweight. China property remains a wildcard, but spreads elsewhere in Asia offer a compelling pickup over DM HY—especially BB credits from India, Indonesia, and even a few Japanese issuers. 🔹 EM ex-Asia IG: Upgraded to neutral. Latin America and the Middle East remain diversifiers, but political risks keep us cautious. 🔹 EM ex-Asia HY: Underweight. Weak fundamentals, fragile macro backdrops, and unattractive valuations make this a tough space. Africa, in particular, looks vulnerable to further downgrades. The Big Picture? Stick with quality in IG, be selective in HY, and don’t chase risk where it isn’t rewarded. As Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.” Are investors too complacent on risk? Or is there still juice left in high-yield spreads? 

NOVEMBER CREDIT RECAP US INVESTMENT GRADE (IG): - IG corporates returned +0.65% in November, lifting YTD gains to 7.99%. - Spreads touched 85bp mid-month before retracing, ending just +1bp wider at 80bp. - The index yield closed at 4.76%. - Tech bonds lagged amid heavy issuance, AI-related concerns, and data center buildouts. - Oracle (ORCL) widened sharply: its $3.5B 5.95% 2055s, issued in September at +125bp, closed November near +180bp—55bp wider. - Ford (F) underperformed on plunging EV sales and recalls. - YTD IG issuance reached $1.729T, one of the largest on record. US HIGH YIELD (HY): - HY corporates returned +0.58% in November, bringing YTD to +8.01%. - Spreads tightened 12bp to 269bp, near the 5th percentile of the past 30 years, after briefly widening to 304bp mid-month. - The index yield ended at 6.57%. - YTD HY issuance totaled $345B. TREASURIES: - Returns were driven by falling UST yields. - The 2Y–7Y curve fell ~9bp, while the 10Y closed at 4.01% (-6bp). - 20Y (4.62%) and 30Y (4.66%) were little changed. WHERE DO WE GO FROM HERE? - Nvidia (NVDA): Bellwether results showed receivables rising faster than sales and unsold chip inventories building; also concerns about circular sales. Shares fell from an all-time high of $207 (Oct 29) to $177 at month-end. - Google: Its AI microchips emerged as cheaper and more specialized, intensifying competition. - Bitcoin: Collapsed from $125k (Oct 6) to $84k mid-month, recovering to $90k. Seen as a risk sentiment barometer amid inflation worries. - Gold: Surged to $4,239, reinforcing safe-haven demand and search for inflation hedges. - Private Credit: Stress persisted—BlackRock waived fees to offset weak loan performance, Blue Owl scrapped a fund merger after investor pushback, and loan failures continued. - Fed Outlook: Markets priced an 88% chance of a 25bp cut at the Dec 10 FOMC, though officials remain split between labor weakness vs. sticky inflation. BIG PICTURE Credit feels tight at historically snug spread levels. Tailwinds include continued Fed easing, potential yield-curve control twists, tax cuts, and deregulation that could expand bank lending. Yet bubble risks loom, leaving risk/reward stretched. Rotating into higher-quality carry, shorter duration, and sectors with tangible cash flow visibility may offer better resilience if volatility resurfaces.