Topical Research

Topical Research – Liquid Credit Trends

June 5, 2023

Credit Markets

Perceived credit risk of large asset managers spiked higher following collapse of SVB and Credit Suisse but have since moderated and remain more contained relative to regional banks

The cost to insure against regional bank defaults has risen steeply, but remain well below GFC levels; implied CDS spreads provide real time insight into banking sector stress

Credit spreads are in line with average levels across most sectors; while a recession still seems probable, spreads where they currently are point to a mild/shallow slowdown

Credit spreads initially widened over the month, but narrowed as risk appetite returned last in May; notably, B-rated bond yields are 65bps below May’s peak and 209bps below July ‘22 peak

Zooming in: despite the very recent narrowing, wider spreads layered on higher base rates are bound to create issues if they persist

Yields on municipal bonds are also trending higher; now above pre-pandemic levels

Bank stress proxies have spiked higher, but remain relatively contained

ETF Trends

Outflows from high yield ETFs have started to put pressure on prices; however, nothing compelling in terms of yields or discounts so far

In terms of yields, some high yield portfolios are getting interesting, but not near levels that would make sense for a potential “hard landing”

High yield funds flipping to outflows, benefiting Treasuries; TLT has had $9.7bn of inflows YTD; SHV has had $3.2bn outflows in May as short-duration products fall out of favor

CEF discounts widened over the month and are currently at -12.1%; notably U.S. taxable bond discounts widened by 1.8% to -7.3%, while U.S. muni bond discounts widened 1.1% to -11.4%

CEF Trends

CEF discounts widened over the month and are currently at -12.1%; notably U.S. taxable bond discounts widened by 1.8% to -7.3%, while U.S. muni bond discounts widened 1.1% to -11.4%

Largest discounts in below investment-grade loan funds given expectations of double hit from declining rates (not helping floating rate) and potential credit losses

BDC Trends

BDCs were a top performer in the credit space in 2021 as credit markets responded well to policy support, performance breaking down on liquidity withdrawal; pockets of value emerging

Appendix 1: Fixed Income & Credit Returns

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Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.