Information for investment professionals

In Credit
2 September 2024

Back to school
Markets at a glance
Price / Yield/ Spread

Change1 weekUS Treasury 10 year

3.90%

10 bps3.6%

2.7%

German Bund 10 year

2.34%

12 bps

2.0%

-0.1%

UK Gilt 10 year

4.06%

15 bps

2.4%

-0.6%

Japan 10 year

0.91%

1 bps

1.1%

-2.1%

Global Investment
Grade102 bps-1 bps3.3%

3.6%

Euro Investment Grade

115 bps

0 bps

2.0%

2.6%

US Investment Grade96 bps

0 bps

3.9%

4.0%

UK Investment Grade98 bps-1 bps1.9%

1.8%

Asia Investment Grade154 bps-3 bps2.9%

5.5%Euro High Yield

361 bps-18 bps

2.4%

5.7%

US High Yield

317 bps-2 bps3.6%

6.3%

Asia High Yield

537 bps-62 bps

2.7%

12.8%

EM Sovereign

342 bps-7 bps4.2%

6.1%

Angelina Chueh

EM Local

6.3%

2 bps

5.4%

1.5%

Euro High Yield Credit

EM Corporate

269 bps-12 bps

3.2%

7.2%

Chris Jorel

Bloomberg Barclays US
Munis

3.4%

1 bps

1.7%

1.3%

Taxable Munis

4.8%

9 bps

4.3%

3.0%

Bloomberg Barclays USMBS

39 bps-1 bps4.3%

3.3%

Bloomberg Commodity
Index

228.58

-0.3%

-4.0%

0.9%

David OliphantExecutive Director,
Fixed Income

Contributors
David OliphantInvestment Grade Credit

Simon Roberts
Macro/Government Bonds

US High Yield Credit,
US Leveraged Loans
Laura Reardon
Emerging Markets

Index QTD Index YTD
return*return

EUR

1.1070

-1.3%

3.1%

0.1%

Kris Moreton

JPY

147.00

-1.2%

10.1%

-3.5%

Structured Credit

GBP

1.3146

-0.7%

3.8%

3.1%

Justin Ong

Source: Bloomberg, ICE Indices, as of 30 August 2024. *QTD denotes returns from 30 June 2024.

Asian Fixed Income

Chart of the week – US GDP beating expectations

Charlotte Finch

15

Responsible Investments
Investment Grade Credit

10%

53%

Gary Smith

0General Fixed Income-5Source: Bloomberg, Columbia Threadneedle Investments, as of 30 August 2024.

CTEA6974196.1 Issued September 2024 | Valid to end November 2024

Jun-24Mar-24

Dec-23

Sep-23Jun-23Mar-23

Dec-22Jun-22

Sep-22Mar-22

Dec-21

Jun-21

Sep-21

Mar-21

Dec-20Jun-20

Sep-20Mar-20Dec-19Jun-19General Fixed Income

Sep-19-10

Sarah McDougall

In Credit  02 September 2024

Macro / government bonds
In the quiet summer lull, price action in the US treasury market continued to set the tone forbond markets globally. The major debate in bond markets was how aggressive the US Fedreal
Reserve would be in cutting interest rates after Jay Powell effectively cemented a September
rate cut with comments in his Jackson Hole keynote speech that the “time has come”. Two
scenarios dominated trader thinking – one for a 50bps rate cut and one for a 25bps rate cut.
The case for the 50bps rate cut had rested on evidence of a continuing deterioration in thelabour market. With inflation under downward pressure, the focus on the Fed has shifted frominflation to the labour market. Unexpected weakness in Non-Farm Payrolls at the start ofAugust, alongside uncertainty over the lagged impact of past cumulative tightening led toconcerns that conditions had become overly restrictive. There was also the politicalconsideration as to whether the Fed may wish to act in September to avoid acting in thepolitically charged month of November when the US presidential election occurs. The case for25bps was for a more gradualist approach, which appeared to chime with recent commentsfrom Fed speakers, who continued to deliver a message of data dependency, as well as cautionthat while progress has been made on inflation, the battle has not yet been won.
The narrative of weaker growth was challenged by economic data. US Q2 GDP came instronger than expected, rising from 2.8% to 3%. Key themes to emerge from the data were therelative strength of the US consumer, as personal consumption grew by 2.9%, a pick-up in
corporate capex amid a recovery in inventory investment, and continuing weakness inresidential consumption (see Chart of the week).
The apparent resilience of the US economy made the market reassess its outlook for interest
rates. A reversal of the recent enthusiasm for duration risk led to a yield curve bear steepening
trend, as longer-dated interest rates rose by a greater magnitude than shorter-dated rates. The
yield on the US 10-year rose to 3.9%, leaving the instrument trade at the midpoint of its current
range. Given a reduced emphasis on inflation the next big market moving piece of data will be
the Non-Farm Payrolls number, which will set the scene for the Fed’s interest rate decision.
European markets were quiet during the last week of the traditional holiday season. The politicalrisk premium on German bonds rose slightly following the success of the far right Alternative forGermany (AfD) party, which won a big victory in the large eastern state of Thuringia, while
coming a close second in the more populous state of Saxony. This raised questions about thepolitical longevity of the current ruling coalition, and whether more mainstream political partiescan create a firewall of sufficient strength, as in France, to limit the potential electoral success ofthe AfD. A rise in political risk premia was expressed through marginally wider country spreads
relative to other eurozone countries. There was also some caution on interest rate policy from
ECB executive board member Isabel Schnabel, who warned against proceeding too quickly ineasing monetary policy, given the elevated level of services inflation. This followed commentsfrom ECB chief economist, Phillip Lane, who warned that the return to 2% is not yet secure.

Investment grade credit
August ended with spreads unchanged from where they started the month. Global IG bonds
now offer a spread of 102bps over government bond yields. This lack of spread change hides
the volatility that marked the early part of the month when spreads widened to 116bps. This
reflected fears of recession in the US that subsided as the month progressed. It felt like ‘back toschool’ in terms of the ‘reopening’ of the primary market. New issuance was heavy following theresults season and the normal summer lull; issuers included Diageo and Telstra.
The outlook for corprorate bonds appears more favourable from a yield than spread
perspective. The global IG index offer a yield of around 4.5%, which is well above the average
3.6% seen in the last 20 years. Spreads, however, remain rich to the average (143bps) over thesame period. Some of the spread richness is mitigated by the reduction in index duration seenin the last few years. The present index duration of 6.1 years is much lower than the 7.5 years
seen in the summer of 2020. Credit markets are supported by robust credit fundamentals such

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In Credit  02 September 2024

as low leverage for corporate issuers and high levels of capital for banks. The decline in interest
rates being delivered in most developed markets is welcome though present assumed ‘terminal’
rates appear to be above the so-called neutral rate of interest in both the US and Europe.
Economic outlook estimates point to a low but positive rate of expansion with a reasonable
macro backdrop for investment. All in all, when fundamentals are compared to valuations andstructural considerations (supply and demand) the outlook looks fairly neutral for spreads.

High yield credit & leveraged loans
It was a risk on, spread compression week as European High Yield experienced strong positive
return in higher beta CCCs, returning 1.2% for the period, 3x the week’s market return (0.44%).
This brings the month’s performance to 1.2% and YTD to 5.6%. August finished with gooddemand for the asset class as inflows continued, posting €273m for the last week of the month,seen both via ETFs and managed accounts. This brings the YTD figure for net inflows to€7.1bn. The primary market remained subdued with only one hybrid issue from Accor, theFrench hotel chain. The issue was well subscribed with the final price coming in at 4.875%,
62bps inside of initial price talk. Market talk is for September to be a strong month in the primarymarket with potentially €9bn of new offerings (including LBO-related issues) in the pipeline.
The reporting season continues with packaging finally showing some turnaround (e.g. Canpack
EBITDA beat and report of capacity expansion). Leisure space is looking positive with PurGym
reporting good Q2 results. Real estate is also continuing to show signs that it is stabilising:numbers are looking solid with occupancy stable at 91%, rental growth of +4.4% with net
leverage coming down (though still overall high at 12%, down from 13%). Overall, financial
figures continue to show a meeting and beating of expectations.
In credit rating news, JaguarLandRover was upgraded to BBB- by S&P. This followed the earlier
August upgrade to Ba2 by Moody’s.
In M&A news, the potential Grifols takeover is taking shape with private equity firm Brookfield
supposedly in talks with sovereign wealth funds about joining the bid. In telecoms, Virgin Mediawas reported as looking to sell a 20-40% minority stake in its Netco to raise £1bn.

Asian credit
The Chinese real estate sector could continue to see ongoing pressure through the rest of2024. The August sales volume of the top 100 developers in China fell by 27% against a low
prior-year base, according to China Real Estate Information (CRIC). Additionally, the property
sales performance in August was weaker than the decline of 20% y/y and 17% y/y in July andJune respectively. The YTD attributable sales to end August 2024 of the top 100 developers fell
36% y/y to around CNY1,893bn, according to CRIC. This underscores the lack of positive
impact from various supportive policies that were announced in May (removal of mortgage floorrate, lower downpayment, reduction of housing provident funds).
According to Bloomberg, China is weighing up a plan that allows homeowners to refinance theirmortgage loans to lower their interest rate burden. As background, China reduced the 5-year
LPR (loan prime rate) to 3.85% in July 2024 to the benefit of new home buyers. However,existing homeowners did not benefit from this lower LPR as existing mortgages will only berepriced by their respective bank lenders in 2025. This drives a disparity between rates forexisting homeowners and new home buyers, which has resulted in an increase in mortgage
prepayment risk. By enabling the refinancing of mortgage loans, existing homeowners could
renegotiate with their bank lenders ahead of the usual mortgage repricing period in January.
With regards to positive ratings actions, Moody’s has revised AACTEC’s outlook to stable(previous: negative) while S&P has revised Xiaomi’s outlook to positive (previous: stable). ForXiaomi, its solid performance in its core businesses (smartphones and internet services)
continues to generate positive free cash flow that allows Xiaomi to fund its investments in EVs.

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In Credit  02 September 2024

Emerging markets
Emerging Market hard currency sovereign bonds posted modestly positive returns (0.1%) lastweek owing to slightly tighter spreads and a flat contribution from US treasuries. Spreads now
stand at 388bps with high yield and investment grade compressing 8bps.
The big news of the week was Ukraine completing its restructuring / consent solicitation withcreditors. Despite a minor technical delay that led to an extension of the early tender deadline,
97.4% of bond holders consented to the restructuring.
One big theme from last week was supply as issuers took advantage of the post Jackson Holestability in US treasuries to come to market. Bulgaria and the Philippines priced large multitranche issues. Bulgaria priced €3bn and $1.5bn across two tranches, which came at a discountof 10-15bps and performed well post issuance. The Philippines was a bit of different story
pricing $2.5bn across three tranches, but pricing was on top of the existing curve and bonds
struggled in the secondary market. With the market reopening post summer holidays, we expect
supply to be a common theme in the coming weeks.
Moody’s gave Pakistan a 1-notch upgrade from Caa3 to Caa2, outlook positive. Moody’s citedimproving macroeconomic conditions and moderately better government liquidity and external
positions for the upgrade. This comes after the government secured a staff level agreement with
the IMF for a 37-month extended fund facility in the middle of July. S&P upgraded Montenegro
from B to B+ as improved budgetary performance helped reduce net general government debt
from a peak of 78% of GDP in 2020 to a projected 53% of GDP in 2024.
In terms of flows, positive momentum continued as EM bonds enjoyed net inflows over theweek thanks to hard currency bonds while local currency continued to witness outflows.

CTEA6974196.1 Issued September 2024 | Valid to end November 2024

In Credit  02 September 2024

CTEA6974196.1 Issued September 2024 | Valid to end November 2024

In Credit  02 September 2024

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 02.09.2024, unless otherwise stated.
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CTEA6974196.1 Issued September 2024 | Valid to end November 2024