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Topical Research – Liquid Credit Trends

- December 6, 2023

Credit Markets

Perceived credit risk of large asset managers spiked higher following collapse of SVB and Credit Suisse; credit default swaps of large banks, while higher, remain more contained relative to regional banks

The cost to insure against regional bank defaults remains elevated but has trended lower in recent months; implied CDS spreads provide real time insight into banking sector stress

Credit spreads are near or below median across most sectors; while a recession still seems probable based on LEIs & manufacturing data, HYB spreads at current levels don’t corroborate that view

Credit spreads have narrowed meaningfully over November, with high yield spreads moving back below 400bps; CCC-rated bond spreads have narrowed 59bps MTD and are now 308bps below the October peak

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

Muni yields and spreads have come off recent highs but are still above pre-pandemic levels

Bank stress proxies have trended higher, but remain relatively contained

ETF Trends

ETF Flows: TLT has had $5.2bn of inflows since the start of October; AGG has also seen inflows of around $2.6bn MTD

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”

CEF Trends

CEF discounts have narrowed since the end of October, but remain historically wide at -11.1%; taxable bond CEF discounts narrowed most to -5.6% and muni bonds to -11.6%

CEF discounts have narrowed since the end of October, but remain historically wide at -11.1%; taxable bond CEF discounts narrowed most to -5.6% and muni bonds to -11.6%

Given negative sentiment and recession concerns, perhaps unsurprising that largest discounts are in credit-sensitive loans and HYBs

BDC Trends

BDCs were a top performer in 2021 as credit markets responded well to policy support, but performance started to break down on liquidity withdrawal in 2022; YTD, BDCs have exhibited strong performance as the economy and markets have surprised to upside

Appendix 1: Fixed Income & Credit Returns

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DEFINITIONS

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.