Information for investment professionals

In Credit
9 September 2024

A quarter or a half?
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

Price / Yield/ Spread

Change1 weekIndex QTD
return*Index YTD
returnUS Treasury 10 year

3.73%

-18 bps

5.0%

4.2%

German Bund 10 year

2.20%

-10 bps

2.9%

0.7%

UK Gilt 10 year

3.90%

-12 bps

3.4%

0.4%

Japan 10 year

0.90%

0 bps

1.5%

-1.8%

Global Investment Grade105 bps

3 bps

4.3%

4.6%

Euro Investment Grade116 bps

2 bps

2.6%

3.1%

US Investment Grade

99 bps

4 bps

5.2%

5.3%

UK Investment Grade

99 bps

1 bps

2.6%

2.5%

Asia Investment Grade161 bps

7 bps

3.5%

6.1%

Euro High Yield

376 bps

9 bps

2.5%

4.8%

US High Yield

339 bps

26 bps3.8%

6.6%

Asia High Yield

562 bps

24 bps

2.1%

12.1%

EM Sovereign

348 bps

6 bps

4.6%

6.6%

EM Local

6.2%-7 bps

6.1%

2.1%

EM Corporate

281 bps

12 bps

3.6%

7.6%

Bloomberg Barclays US Munis

3.4%-7 bps2.2%

1.8%

Taxable Munis

4.6%-21 bps

6.4%

5.1%

Bloomberg Barclays US MBS

41 bps

2 bps

5.6%

4.6%

Bloomberg Commodity Index

223.81

-2.4%

-6.3%

-1.4%

EUR

1.1049

0.3%

3.5%

0.4%

JPY

142.89

2.7%

13.0%

-0.9%

Emerging Markets

GBP

1.3095

0.0%

3.8%

3.1%

Kris Moreton

Source: Bloomberg, ICE Indices, as of 6 September 2024. *QTD denotes returns from 30 June 2024.

Structured Credit

Chart of the week – US job creation, 2021-2024US High Yield Credit,
US Leveraged Loans
Laura Reardon

Justin Ong
Asian Fixed Income
Charlotte Finch
Responsible Investments
Investment Grade Credit

Gary Smith
General Fixed Income

Sarah McDougall
General Fixed Income
Source: Bloomberg, Columbia Threadneedle Investments, as of 9 September 2024.

CTEA6995502.1 Issued September 2024 | Valid to end November 2024

In Credit  09 September 2024

Macro / government bonds
Last week saw a bull steepening yield curve in the US Treasury market, as we awaited
potentially market-moving data on the state of the US labour market.
The context for market price action last week was concerns amongst traders that the USeconomy was in danger of slipping into recession and the Fed had fallen behind the curve inloosening monetary policy. For adherents of this view, the ‘canary in the coal mine’ was the US
labour market. To justify the market pricing of four quarter point interest rate cuts by year end,
traders needed to see a continuing deterioration in the US economy First came manufacturing
data from PMI and ISM. Both readings at the headline level pointed to continuing weakness inthe manufacturing sector (with levels at sub 50) and softer employment growth. The relatively
small share of manufacturing in the US economy, however, meant the data had a muted impact
in pushing yields lower.
On the heels of this came reports about the Service sector from PMI and ISM. The PMIServices report edged a notch higher from 55.2 to 55.7, while the ISM Services Index remained
unchanged at 51.5. Both reports pointed to strength in the services sector and an easing ininflation, which was indicative of a soft landing rather than outright recession. We also had theADP employment number, which confirmed labour market cooling.
The Non-Farm Payroll data (see Chart of the week), when it came, disappointed markets. It
failed to answer the question as to whether the US was entering a recession, and whether the
next cut in US interest rates would be 25bps or 50bps. The number of new jobs created was142k. This initially led to a sell-off until the market began to focus on the downward revision to
the prior month’s release from 114k to 89k. The data was insufficient to power the market rally
further, as US Treasury valuations looked increasingly rich. Over the space of a week, theyields on the 10-year US Treasury fell 20bps to 3.71%, which left valuations looking rich, andvulnerable to any shift in market sentiment
In terms of Fedspeak, the two most important voices last week were those of New York Fed
President John Williams, and Fed Governor Christopher Waller. Williams remarked that thedata was consistent with a slowing economy and a cooling in the labour market and that it
would be appropriate to start cutting rates. His remarks fell short of giving any indication on sizeand pace. Waller made the point that the time for patience was over and the time for action hadcome. One observation of Fed speakers was that their recent comments had focused to a muchgreater extent on the labour market rather than inflation, which increasingly seems to be on
track to its 2% target.
In the UK, we had the Decision Maker’s Panel, which the Bank of England views as animportant source of data. Firms’ plans to raise prices in the year to August fell to 3.4% from
3.7% in July, while pay growth grew 5.7% in the year to August. The relative strength of the UK
economy was also highlighted by the Services PMI report, which remained unchanged at 53.7.
Evidence of disinflation supported the decision to cut rates in August but pointed to thelikelihood of a more cautious approach from the Bank. The main mover of the UK gilts market,
as per other markets, was price action in the US Treasury market.
In the eurozone, we saw economic data mirror that of the UK and US with strength in services
and weakness in manufacturing, There was broad unanimity on a September rate cut, with up
to a further two cuts by year end
Elsewhere, the Bank of Canada reduced its policy rate from 4.5% to 4.25%, amid slowing
inflation and a cooling labour market.

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In Credit  09 September 2024

Investment grade credit
Over the week, global credit spreads widened from 102bps to 105bps.
The month of September kicked off with a wall of new issuance globally. This follows the USLabour Day holiday, European summer recess and results season. Luckily, demand for theasset class remains strong, driven by higher yields rather than particulary attractive corporatebond spreads. This meant that there was only a minor bout of indigestion and spread widening
last week. Indeed, markets are probably more concerned about the risk of a slowing economy
than heightened levels of primary market activity. Interestingly, analysis from JP Morgansuggests that a significant portion of this (US dollar) issuance is coming from M&A (c13%), as
well as being to pay dividends.

High yield credit & leveraged loans
US high yield bond total returns were assisted by lower interest rates as spreads widened
amidst cooling labour market data, the resumption of primary issuance and small fund outflows.
The ICE BofA US HY CP Constrained Index returned 0.25% and spreads were 25bps wider.
The index yield-to-worst was unchanged at 7.27%, remaining around levels not seen in morethan two years. According to Lipper, US high yield bond retail funds saw a $48m outflow for theweek, following $3.2bn of inflows over the prior two weeks. In floating rates, the average price of
the Credit Suisse Leveraged Loan Index was steady at $95.6 in an environment of stable flows
and light new issuance. Retail loan funds saw a sixth consecutive, albeit modest, weekly outflow
with a $38m withdrawal over the week.
European High Yield (EHY) showed resilience last week as spread widening (+16bps to446bps) was offset by a fall in yields (-0.14% to 8.4%) due to the fall in underlying government
bond yields. As a result, performance was basically flat for the week (+0.04%), with CCCs
moderately outperforming higher-rated credits (+0.18% vs +0.02% for BBs and Bs). Demand forthe asset class continued with another week of inflows (€232m) being added to the asset classacross both ETFs and managed accounts though decisively stronger in the latter. The primarymarket continued the previous week’s subdued nature with again only hybrid issues (€1bn), thistime for SES, the satellite company.
In M&A news, Boparan announced that its European (Poland and Netherlands) poultry division
will be sold to the Boparan private office for €200m with majority of the proceeds to go to debt
reduction. On the Grifols’ takeover story, Brookfields does not appear to be making muchtraction on getting sovereign wealth funds to join the bid as Qatar Investment Authority madeclear its lack of interest.
In sector news, gaming continues to perform well with UK’s 888 posting better than expectedfinancial figures. This was the opposite for the auto sector where there seems to be a shift in
outlook and strategy as firms re-consider the large capital requirements for conversion to EVs.
Volvo was the poster child last week as it scaled back on its outlook for 100% EVs production,saying that there would be more of a mixture with hybrids. This comes on the back of lower than
expected demand for EVs.
Under the Rising stars and Falling Angels, there was another departure from EHY as theNational Bank of Greece was given a 2 notch upgrade to Baa2 by Moody’s. YTD, the market is
net up 6% for Rising Stars versus Falling Angels.
Word on the street is that the coming weeks will be busy with upcoming new issuance supply to
be as much as €32bn, but this will be skewed to loans as corporate bond issuance is expected
to be around €8bn.

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Structured credit
The US Agency MBS sector posted a 1.26% gain last week with market participants all-in on
the duration trade. The rate rally and re-inversion of the 2s-10s curve in over two years led tostrong appetite for the sector overall. 30-year agency MBS outperformed 15-year and the bellyof the coupon stack did best as investors picked their spots on the prepay curve. August speeds
were up 3% for 30-year mortgages. September should be a bit slower given the shorter daycount. There wasn’t much specific news to note other than a slight uptick in mortgage
applications led by purchases. In non-agency RMBS, spreads were mostly tighter 5-10bps
across all sub-sectors. In CMBS, just one private label priced last week. We would expect apick-up in the number of new loans and new deals issued on the improved refi market if rates
continue to rally. Delinquencies 60+ days rose to 5.1% and 52 bonds (15 deals) weredowngraded, while none were upgraded as stress continues in the office sector. It was a busy
week in ABS. Five new issue ABS deals totalling $4.4bn priced and approximately 18 new deals(c$13bn) are currently marketing. YTD volumes are up 30% versus last year, a record versus
comparable periods in all prior years. Spreads were mostly unchanged week-over-week withmost still marginally above their 24-month lows.

Asian credit
In China, the PBOC indicated making further cuts to the RRR (reserve requirement ratio), whichcurrently stands at 7% for financial institutions. PBOC had made similar comments in January2024 and July 2023, before making subsequent cuts to the RRR ratio. This implies a highlikelihood for RRR reduction over the near-term. The PBOC confirmed that 7-day reverse repo
rate (1.7%) is now the official policy rate, in line with the PBOC’s intent to simplify the existing
policy rate framework and lower the reliance on the one-year policy rate (MLF – medium term
lending facility).
The Caixin services PMI was softer in August, with a print of 51.6 (down 0.5 m/m) and coming
somewhat below consensus. The services sector in China is still expanding albeit with a slower
pace in August. The surveyed companies highlighted margin pressure in August on the back ofhigher input material, labour and transport costs. By contrast in India, the service sector growth
was strong, coming at 60.9 (a 5-month high), thanks to solid payroll trend and positive businesssentiment.
In Chinese properties, Country Garden continues to face a tight liquidity situation due to theongoing pressure on home sales. The company plans to delay coupon and principal instalmentspayment on nine onshore CNY notes for six months. Additionally, Country Garden announced
that PWC is resigning as its auditor. PWC has reportedly lost around two-thirds of its mainlandclients after the fallout of its audit work with Evergrande, which remains the largest property
defaulter so far.
Adani Green Energy Ltd (AGEL) has announced another JV with TotalEnergies, which would be
the third 50/50 partnership between both companies. TotalEnergies also currently holds a19.75% in AGEL. For the new JV, which has a portfolio of 1.15GW of solar projects,
TotalEnergies will invest $444m.

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Emerging markets
The Emerging Market hard currency sovereign bonds posted positive returns (0.26%), helpedby US Treasuries. Spreads were broadly unchanged at around 387bps, with high yield
performing better, partly thanks to Ukraine bonds, which offset the wider investment gradebonds.
On 4 September, Ukraine announced the successful completion and settlement of its debt
restructuring exercise, which effectively reduced Ukraine’s debt by close to $9bn. The oldsovereign bonds with around $20.5bn of outstanding principal amount (or $25bn includingaccrued interest) were exchanged to eight new Eurobonds series with $15.2bn in principal
amount. The reconstitution of the Ukrainian debt was made to the JPM indices on 5 September.
In Mexico, the Lower House of Congress has approved the judicial overhaul proposed byPresident Andres Manuel Lopez Obrador (AMLO). This contentious proposal has raisedtensions in Mexico over the politicization of the judiciary system to favour the ruling Morena
Party (under President AMLO) and its allies. Next, the bill moves to the Senate where thegoverning coalition only requires one more vote to reach the supermajority required to pass it.
The US may impose new sanctions on Venezuelan government officials following the disputed
re-election of President Maduro in July. Earlier in April, the Biden Administration had reinstatedthe sanctions on oil exports by Venezuela over the absence of a fair election.
The primary market was very active with numerous sovereign and corporates taking advantageof the demand for new paper. PIF (Saudi sovereign wealth fund) and Indonesia are therecurring issuers this year. In Latin America, the new issue pipeline was busy with Uruguay,
Petrobas and Eletrobras in the market. Vedanta Resources PLC (low-B rated mining company)
has launched a tender offer for its existing bonds (2027s and 2028s) in conjunction with aproposal to issue new bonds.

CTEA6995502.1 Issued September 2024 | Valid to end November 2024

In Credit  09 September 2024

CTEA6995502.1 Issued September 2024 | Valid to end November 2024

In Credit  09 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 09.09.2024, unless otherwise stated.
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CTEA6995502.1 Issued September 2024 | Valid to end November 2024