Information for investment professionals

In Credit
29 July 2024

The rehabilitation of Real Estate
Markets at a glanceDavid OliphantExecutive Director,
Fixed IncomeContributors
David OliphantInvestment Grade Credit

Simon Roberts
Macro/Government Bonds

Angelina Chueh
Euro High Yield Credit
Chris Jorel
US High Yield Credit,
US Leveraged Loans
Laura Reardon

Price / Yield/ Spread

Change1 weekIndex QTD
return*Index YTD
returnUS Treasury 10 year

4.15%

-9 bps1.4%

0.5%

German Bund 10 year

2.35%

-12 bps

0.9%

-1.2%

UK Gilt 10 year

4.02%

-10 bps

0.8%-2.2%

Japan 10 year

1.03%

-2 bps

0.1%

-3.2%

Global Investment Grade

100 bps

2 bps

1.4%

1.7%

Euro Investment Grade109 bps

1 bps

1.3%

1.8%

US Investment Grade95 bps

2 bps

1.5%

1.6%

UK Investment Grade

97 bps

2 bps

1.0%

0.9%

Asia Investment Grade152 bps

3 bps

1.0%

3.5%

Euro High Yield

369 bps

8 bps

0.9%

4.2%

US High Yield

310 bps

1 bps

1.7%

4.4%

Asia High Yield

598 bps

3 bps

1.5%

11.4%

EM Sovereign

349 bps

3 bps

1.4%

3.3%

EM Local

6.5%-3 bps1.9%-1.9%

EM Corporate

276 bps

5 bps

1.2%

5.1%

Bloomberg Barclays US Munis

3.6%-1 bps0.8%

0.4%

Taxable Munis

5.0%-4 bps

1.6%

0.4%
0.7%

Bloomberg Barclays US MBS

44 bps

1 bps

1.7%

Bloomberg Commodity Index

226.82

-1.5%

-4.6%

0.3%

EUR

1.0817

-0.2%

1.3%

-1.7%

153.89

2.4%

4.6%

-8.3%

GBP

1.2837

-0.4%

1.8%

1.1%

Kris Moreton

Source: Bloomberg, ICE Indices, as of 26 July 2024. *QTD denotes returns from 30/06/2024.

Structured Credit

Chart of the week – Global IG Real Estate spreads, 2021-2024

Justin Ong

Charlotte Finch
Responsible Investments
Investment Grade Credit

Gary Smith
General Fixed Income

Sarah McDougall
General Fixed Income

Spread (bps)Asian Fixed Income

300
280
260
240
220
200
180
160
140
120
100

7/23/2021
8/23/2021
9/22/2021
10/22/2021
11/22/2021
12/22/2021
1/24/2022
2/23/2022
3/25/2022
4/27/2022
5/26/2022
6/27/2022
7/27/2022
8/25/2022
9/26/2022
10/26/2022
11/25/2022
12/28/2022
1/27/2023
2/28/2023
3/30/2023
5/1/2023
5/31/2023
6/30/2023
8/1/2023
8/31/2023
9/30/2023
10/31/2023
11/30/2023
1/2/2024
2/1/2024
3/4/2024
4/3/2024
5/3/2024
6/4/2024
7/3/2024

JPYEmerging Markets

Source: ICE Indices, Bloomberg & Columbia Threadneedle Investments, as of 24 July 2024.

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Macro / government bonds
Following the path of the 10-year US Treasury yield can give the impression that not much ishappening, as the 4.20% / 4.25% range is where we remain stuck. But, as with the proverbialgliding swan, paddling beneath the water line is non-stop.
During the week the US curve steepened to YTD extremes (-12bps for 2s10s, and +43bps for5s30s) as market pricing of future cuts from the Fed fluctuated. Firstly, this was on the back ofcomments from retired Fed governor Dudley who argued for an August cut – before correcting
when stronger than expected US GDP data for Q2 was published on Thursday. Both moves
were probably accentuated by thin summer market conditions.
Accordingly, the easing priced into September Fed funds futures reached a high of 33bps
before finishing the week at 25bps.
The global rates team maintain a long duration position, which is expressed predominantly in
the US Treasury market. One trade of note last week was a shift out of UK gilts into a
combination of Aussie and US government bonds.

Investment grade credit
It was a another quiet week for investment grade bonds.
Spread volatility remains low and Global IG spreads have traded in a range of around 10bps
since early March. Low levels of spread volatility at a time of tight spreads were in evidence theyears that preceded the Global Financial Crisis and more recently in 2021.
Credit curves have steepened in a reversal of last year’s trend with shorter-dated bond spreads
tighter on a percentage basis this year than their medium and longer-dated cousins.
Sector wise, globally, the real estate sector stands out as the best performing area of themarket closely followed by banking and insurance. Quite a contrast to last year. The moredefensive utility, healthcare and telecoms sectors have performed less well though spreads aretighter. The Global Real Estate Index spread had widened from aound 105bps in mid 2021 toover 280bps in October of the following year before tightening to around 125bps last week,
accroding to data from ICE indices (see Chart of the week).

High yield credit & leveraged loans
US high yield bonds continued to perform well amidst the heaviest retail fund inflows YTD andan increase in primary market activity. The ICE BofA US HY CP Constrained Index returned
0.31% while spreads were 2bps wider. The asset class reported a $1.5bn inflow for the week,
according to Lipper. The flow was split roughly 50/50 between ETFs and active managers.
Meanwhile, the average price of the Credit Suisse Leveraged Loan Index declined slightly to$95.7. Retail loan funds saw $530m contributed over the week.
European High Yield (EHY) saw strong demand last week, even as spreads widened (+8bps to369bps) while yields fell marginally (-2bps to 6.80%). Inflows into the asset class, via both ETFs
and managed accounts, were €416m for the period with a decent chunk directed to shortmaturity EHY. Returns were modest for the week (+0.15%) on the back of decompression,
specifically in the case of CCCs (+0.60% return) as single Bs were the worst performers, while
BB marginally underperformed the market (+0.14% return). Sterling high yield outperformed
EHY by more than 2x (0.34% return).

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In M&A news, Apollo, the private equity group, is buying IGT and Everi's gaming and digitalbusiness, valuing it at $6.3bn. IGT will receive $4.05bn of gross cash proceeds and will likely
use the cash mostly for debt reduction as well as shareholder returns. It should be noted that
this amount is significantly more than the $2.6bn that IGT would have received under the old
split of newco with the lottery remaining at IGT.
In credit rating news, Moody’s downgraded CPI Property Group to Ba1. This follow’s S&P’s
downgrade to BB+ that occurred at the end of May this year. Moody’s cited the company’s weak
position considering the loss of equity credit for the hybrids; the challenges to address overupcoming medium term refinancings; and the group’s structural complications. Moody’s also
downgraded Thames Water to Ba1 making the issuer the latest Fallen Angel. The issuer is still
rated BBB- by S&P. Moody’s indicated that the company may be challenged in finding newinvestment following the regulator’s announcement that it will impose a “turnaround oversightregime” on the utility.

Structured credit
Lower rates and a steeper curve continued to progress this month and agency MBS posted a30bps positive return on a generally good week for duration. 30-year agency MBS outperformed
15s, and the belly of the coupon stack did best. Sooner rather than later rate cuts are expected
to lend support to the sector as volatility continues to decline. Meanwhile, existing home sales
hit their lowest level since December and new home sales fell below November 2023 levels.
In ABS, new supply was slightly lower than the previous week. Autos continue to issue thelargest portion of weekly issuance with Toyota, USAA, Carmax, Exeter and Chase all pricing
deals. Two smallish single family rental deals and two unsecured consumer loan backed deals
also priced. Deals were fairly well subscribed. Flows in the secondary market were modest as
investor attention was on the primary market. Liquidity remains fairly robust.
The new issue machine is alive and well in CMBS in both sub-sectors, SASB and Conduit. A
total of four SASB deals priced on Thursday for $2bn. We now have a total of 12 non-agency
deals that have priced in July for a total of $9.5bn. YTD we have now priced $57bn in new issue
private label deals, compared to around $22bn this time last year. Secondary spreads wereunchanged last week despite the heavier than expected supply from primary deals. If thisdemand stays throughout the summer, we could see secondary start to move tighter given thelack of a primary calendar moving forward.

Asian credit
In China, PBOC’s recent rate cuts to the 7-day OMO reverse repo rates and the LPR (LoanPrime Rates) have paved the way for rate cuts in the banking system. The major big four stateowned banks (Bank of China, ICBC, CCB and ABC) have made cuts to their time deposit rates,marking the fifth round of deposit rate cuts since spring 2022. Additionally, on the same day as
the rate cuts by the banks, the PBOC also cut the MLF (medium-term lending facility) by 20bps
to 2.3%.
The National Democratic Alliance, led by Prime Minister Modi’s BJP (Bharatiya Janata Party),
has presented its India Budget with more emphasis on fiscal consolidation. The fiscal target for
FY24-25 is reduced to 4.9% (vs previous target of the interim budget: 5.1%) while the FY25-26
fiscal target is unchanged at 4.5%. The government expects to achieve this target throughhigher tax collections. While there is still a focus on infrastructure spending, the India Budget
has more allocation for education and training to address the skill gaps in the country.

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In Credit  29 July 2024

Emerging markets
A slightly softer week in EM credit, where spreads began (modestly) to reflect the souring in
global risk sentiment. Still, with index spread only 3bps wider over the week, hard currency debt
markets displayed remarkable resilience in the face of US political turmoil and the marked
softening of developed market economic data, despite the meaningful uptick in volatility
measures and curve steepness since the start of July.
The same cannot be said for EM local markets, where the dismantling of the Japanese yen
carry trade has taken the wind from the sails of many of that strategy’s EM beneficiaries.
LATAM currencies have been hit by a combination of fiscal concerns, weaker commodities andgovernance concerns amid a testing global backdrop.
EM credit fundamentals continue to improve: Azerbaijan and Paraguay are the latest sovereignissuers to enjoy upgrades to investment grade (from Fitch and Moody’s respectively).
Meanwhile, primary markets remain open to issuers: last week saw supply in sectors such as
Indian renewables, Chinese autos and Chilean energy.
After some enthusiasm for the prospect of political change (and sovereign bonds trading nearrecent highs), Venezuela’s election seems to have delivered victory for the incumbent, Nicolas
Maduro. Market prospects from here likely depend on the response in the streets and from theinternational community.

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In Credit  29 July 2024

CTEA6838334.1 Issued July 2024 | Valid to end September 2024

In Credit  29 July 2024

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CTEA6838334.1 Issued July 2024 | Valid to end September 2024