Information for investment professionals

In Credit
1 July 2024

Half time
Markets at a glanceDavid OliphantExecutive Director,
Fixed Income

Contributors
David OliphantInvestment Grade Credit
Simon Roberts
Macro/Government Bonds
Angelina Chueh
Euro High Yield Credit
Chris Jorel

Price / Yield/ Spread

Change1 weekIndex QTD
return*Index YTD
returnUS Treasury 10 year

4.41%

15 bps

0.1%

-0.8%

German Bund 10 year

2.58%

16 bps

-0.7%

-2.1%

UK Gilt 10 year

4.22%

14 bps

-1.1%

-2.9%

Japan 10 year

1.06%

9 bps

-2.7%

-3.2%

Global Investment Grade103 bps

0 bps

0.2%

0.3%

Euro Investment Grade118 bps-1 bps0.1%

0.5%

US Investment Grade

96 bps

0 bps

0.1%

0.0%

UK Investment Grade

99 bps-1 bps

-0.1%

-0.1%

Asia Investment Grade151 bps

3 bps

1.2%

2.5%

Euro High Yield

373 bps

4 bps

1.5%

3.2%

US High Yield

321 bps

0 bps

1.1%

2.6%

Asia High Yield

602 bps-3 bps

3.8%

9.8%

EM Sovereign

344 bps

14 bps0.4%

1.8%

EM Local

6.6%

4 bps

-1.6%

-3.7%

EM Corporate

267 bps-5 bps

1.5%

3.8%

Bloomberg Barclays US Munis

3.7%

5 bps

0.0%

-0.4%

Taxable Munis

5.2%

10 bps

-0.8%

-1.2%
-1.0%

Bloomberg Barclays US MBS

48 bps

4 bps

0.1%

US High Yield Credit,
US Leveraged Loans

Bloomberg Commodity Index

238.28

-0.6%

2.9%

5.1%

Laura Reardon

EUR

1.0766

0.2%

-0.7%

-3.0%

JPY

160.99

-0.7%

-5.9%

-12.3%

Emerging Markets

GBP

1.2671

0.0%

0.2%

-0.7%

Kris Moreton

Source: Bloomberg, ICE Indices, as of 28 June 2024. *QTD denotes returns from 31 March 2024.

Structured Credit

Chart of the week: the falling yen, 2019-24

Justin Ong

160

Charlotte Finch

150

Responsible Investments
Investment Grade Credit
Gary Smith
General Fixed Income

JPY / US Dollar

Asian Fixed Income

140
130
120
110

Sarah McDougall
General Fixed Income

100

12/07/2019

12/07/2020

12/07/2021

12/07/2022

Source: Bloomberg & Columbia Threadneedle Investments as of 1 July 2024.

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Macro/government bonds

US Treasury yields edged higher in the absence of any major market catalysts. We have had amosaic of US economic data: goods orders, labour market strength, housing and inflation. While
US Treasury markets are normally more sensitive to inflation data, the market had alreadydigested consumer and producer price data earlier in the month and could therefore estimate
what the outturns for Personal Consumption Expenditure (PCE) and Core PCE were likely to
be. Core PCE month-on-month came in at 0.1% – in line with market expectations. This was thesmallest increase since November 2020. Stripping out financial and transport services from the
PCE figure, the so-called core-core measure of inflation came in at 0.29%, below the 0.40%
average in Q1.
At this point in the economic cycle, there seems a reduced probability of a reacceleration of
inflation, given accumulating labour market slack, flat commodity prices and increasing pressure
on margins. This will be good news for policy makers at the US Federal Reserve, who want todemonstrate that the economic medicine is having an effect, before loosening monetary policy.
We also had the first presidential debate between Joe Biden and Donald Trump, in which Biden
was widely regarded as performing poorly. The election timetable points to increased volatility in
the US Treasury market, as well as the attraction of steepening strategies. The expectation oflower future interest rates should push down yields at the front end, while the prospect of fiscally
expansionary policies by either candidate is likely to exert upward pressure on long-end interest
rates.
We also saw increased volatility in France around its ongoing election following increased
support for the far right, which is also seen as adopting a fiscally expansive stance. French
assets sold off from government bonds to equity. The spread on French sovereign bonds
relative to German sovereign bonds continued to widen, reaching 0.82% at its height last week,
as investors raised questions about the viability and durability of a right-wing Frenchgovernment led by Marine Le Pen’s National Rally movement.
Elsewhere we had a spike in the JPY-USD exchange rate yen to 167 last Friday – a 37-year
peak (see Chart of the week). The predominant driver of yen weakness remains the significant
interest rate differential between these markets. While the Bank of Japan appears to have no
immediate plans to adjust interest rates meaningfully, it looks set to alter its government bondpurchases. Across the Global Rates desk we are constructive on duration in US and eurozone
interest rate markets, have a bias to yield curve steepening positions, as a well as a shortposition in Japan.

Investment grade credit

It was a quiet quarter for investment grade credit markets. At the end of March, global corporatebond spreads were trading with a spread of 101bps over government bonds, and ended thesecond quarter at 103bps according to data from ICE indices. The quarter can be split into two
sections: the first two months of modest spread tightening then a small “jump” wider in June –led primarly by political uncertainty in France. Through the second quarter the range of spreads
was from 94bps-103bps, which is very tight indeed. Sector wise, this year the “winners” havebeen real estate and banking bonds (last year’s losers), plus insurance company debt. Globally,
all sectors, bar media, are tighter spread-wise, though healthcare spreads are barely moved in
2024. Credit curves have steepened with shorter-dated bonds in USD, Euro and GBP markets
all outperforming longer-dated debt this year, tightening by a greater percentage.
The outlook for IG credit spreads is fairly mixed. We see a more positive economic outlook than
was the case six months ago with low but positive growth expected for the rest of the year in the
US and Europe. This “not too hot, not too cold” environment should be a reasonablebackground for IG credit. High interest rates and policy expectations remain a challenge, but asinflation continues to fall we expect to see lower rates in the next six months (the ECB has cut
once already) and UK inflation is back at target (2% year-on-year) giving the Bank of Englandthe opportunity to move rates at upcoming meetings.

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Market valuations/spreads remain somewhat stretched against both shorter- (five years) andlonger-term (two decade) norms. This seems more the case for the US dollar market than for
euro-denominated bonds. We note that market durations are much lower today than was thecase in 2021, after the sharp rise in yields, so spreads per unit interest rate risk ameliorate
some of the valuation concerns.
Our assessment of corporate/banking fundamentals remains positive. We see supportive lowlevels of leverage in the coming year for corporates and historically high levels of capital forbanks. Spread volatility was low through April and May, but the rise in in June has helped soothfears of rising market complacency.

High yield credit & leveraged loans

US high yield bond valuations were largely unchanged over the week amid light capital market
activity and limited fund flow activity.
The ICE BofA US HY CP Constrained Index returned 0% and spreads were 3bps tighter. The
yield-to-worst increased 0.07% to 7.90%. Retail high yield bond funds reported a $78 million
outflow, leaving flows for June at +$1.4 billion. Meanwhile, the average price of the Credit
Suisse Leveraged Loan Index declined another $0.01 to $95.7. Retail loan funds saw a small$48 million inflow, leaving the month’s inflow at $1 billion. While high yield bonds (0.97%)
outperformed loans (0.27%) in June, loans (4.44%) retained their year-to-date outperformanceedge versus bonds (2.60%).
European HY had a soft week as it finished June with a modest positive return (+0.06%),
closing the month with a solid +0.59% as spreads widened both over the week (+4bps) and themonth (+22bps). Yield continues to remain around 7%. Flows turned sharply negative with€573 million out, all via ETFs, as managed accounts posted a small inflow. June still finishedwith a net €100 million inflow for the month, bringing the year-to-date inflow to €5.5 billion for theasset class. The primary market picked up in the last week of the month with €4.2 billion across
six issuers. This brings the year-to-date gross issuance to €64 billion, surpassing the total
issuance for 2023, with net issuance at €8 billion.
In credit rating news, a number of downgrades were announced last week. Grifols wasdowngraded two notches by Moody’s to B2 for secured debt and one notch to Caa2 for
unsecured debt, as the rating agency cited the higher leverage and expectation of flat free cash
flow this year. Governance concerns were also mentioned, which is interesting given the steps
already taken by the firm to address this issue. It should be noted that S&P moved the issuer
from “negative watch” to “stable” last month. In other negative news, Intrum was also
downgraded by Moody’s to Caa2 and to CCC by S&P. In this case this comes on the tail of thedebt collector’s restructuring plan, which is expected to go through. However, it was also notedthat this plan will not change the capital structure and there is an increased likelihood of a
distressed exchange. Arrow Global, the financial services group, was downgraded to B+ at
Fitch on continued “material leverage, which amid higher interest rates increases pressure on
its financial metrics”. This brings it in line with Moody’s and S&P ratings of B1/B. Lastly, HSE
Finance, the teleshopping group, was downgraded to CCC+ by S&P who stated that they see
the issuer’s capital structure as unsustainable in the long term.

Structured credit

It was a tough week for bonds including Agency MBS. The sector ended down 88bps on higher
interest rates and wider spreads. The 15-year MBS outperformed 30 years as the curve bear
steepened. Spreads widened across maturities and the coupon stack. Meanwhile, mortgage
applications were higher for the third consecutive week, despite S&P Core Logic posting arecord high year-on-year increase at 7.2%. In non-agency, RMBS issuance was $3.3 billion last
week, bringing the year-to-date volume to $62 billion. Most deals priced wider than expected.
CRT spreads widened 5bps-20bps while AAA Non QM widened 5bps. In CLOs, AAA CLO
spreads are in the fifth percentile over the past 12 months given the voracious appetite for CLO

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risk. Across the stack, CLO bonds are equally rich while loans are trading closer to median. In
commercial real estate markets there was heavy new issue supply for both the SASB and
CMBS Conduits, with poorly underwritten deals trying to get done at aspirational levels. There
were two conduit deals that had to widen materially to get traction in the book. What wasdifferent about last week was secondary joined the party and moved 5bps-7bps wider week-onweek on relatively light supply. With low customer demand, dealers have been put in a positionof providing liquidity on second tier names into month-end.

Asian credit

For the China property sector, S&P revised its expectation lower for residential property sales in
2024 to a decline of 15% year-on-year (against a previous estimate of a 5% decline). Fitch also
reduced its sales expectation lower, to a drop of 15%-20% year-on-year (versus a previous
estimate of a 5%-10% drop). In Beijing there was further easing in the policies on homepurchases. The minimum downpayment ratio for a first home was lowered to 20% (down from30%) while the minimum mortgage rate was reduced by 55bps to 3.5%.
In India, the major telecom mobile operators have announced tariff hikes which will be
implemented in early July. Reliance Jio was the first to announce its plans, followed by Bharti
Airtel and Vodafone Idea. This development will bring positive upside to the sector ARPU
(average revenue per user), depending on the flow-through of the tariff hikes – albeit partly
offset by the potential downtrading in certain subscriber segments. Positively, too, the telecom
operators were not aggressive in bidding for more spectrum in the latest auction, which reflects
their financial discipline. Collectively, they spent INR113.4 billion (around US$1.36 billion) for141.MHz of spectrum. For context, India’s Department of Telecommunication was auctioning
10GHz of spectrum for INR962.4 billion (base price).

Emerging markets

The quarter-end treasury sell-off negated the positive return from EM spreads last week,
resulting in a return of -0.35% for the EM hard currency sovereign index. Europe was the only
region which was positive, aided by Ukrainian bonds which retraced some of their weakness
from the prior week.
Protests erupted in Kenya against the government’s proposed 2024 Finance Bill, which included
unpopular reforms. At least 23 people died and President William Ruto conceded to demands
and withdrew the bill which included tax rises. The removal of the bill will make needed fiscal
consolidation more challenging and puts the current IMF program at risk.
In South Africa, following the formation of a new government of national unity, the president
announced his cabinet which allocated six of the 32 ministerial positions to opposition politiciansfrom the Democratic Alliance (DA).
The combination of the lower volatility backdrop and the upcoming typically quieter summer
months provided an opportunity for EM countries to come to market. Last week saw a flurry of
new issuance, almost $6 billion, following what had been a fairly quiet month. Encouragingly,
high yield issuers such as the Dominican Republic have been able to partake in primary market
activity. Alongside this, the asset class saw the largest weekly inflows since January, led by EM
hard currency bond funds which enjoyed +$843 million of flows.
In central bank news, Turkish policy makers opted to hold rates at 50%. Mexico also held at
11% having finally started their easing cycle in March as the last country in Latin America tostart cutting. However, since then inflation readings have printed higher over three consecutive
months; moreover the decline in the peso since the election at the start of June has also added
to pressure. The Czech Republic cut rates by 50bps to 4.75%.

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Responsible investments

The ESG debt market has had a record breaking start to the year in issuance to-date. According
to Bloomberg, labelled bond issuance totalled more than $600 billion on Friday last week, up
7.2% versus the same period last year. The expectation is that, despite the second half of thisyear poised for a slightly slower pace, we should still see a record total level of issuance in six
months’ time. There is now more than $5 trillion that has been raised in the labelled bondmarket since 2007 when this market really began, where use-of-proceeds are mainly targeting
green-based projects via green bonds, while other bonds are funding social or transition-related
developments.
Iceland launched a gender bond last week, via a private placement to an asset manager. The
use of proceeds will include helping give women in vulnerable positions access to essentialsocial services and decent living standards, as well as funding state services to look after
elderly relatives, acknowledging the burden of unpaid care and domestic work. The €50 million
raised is the first of its kind from a Sovereign, where Iceland already excel as the most genderequal country in the world. The hope is for other Sovereigns to take note and bring similar
examples to the market for more investors to partake.

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Important information: For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). Source forall data and information is Bloomberg as at 25.03.2024, unless otherwise stated.
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CTEA6749827.1- Issued July 2024 | Valid to January 2025