Information for investment professionals

In Credit
15 July 2024

A farewell to inflation.
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
US High Yield Credit,
US Leveraged Loans
Laura Reardon

Price / Yield/ Spread

Change1 weekIndex QTD
return*Index YTD
returnUS Treasury 10 year

4.21%

-7 bps1.3%

0.5%

German Bund 10 year

2.48%

-7 bps

0.1%

-2.0%

UK Gilt 10 year

4.10%

-3 bps

0.7%

-2.3%

Japan 10 year

1.07%

-1 bps

-0.1%

-3.3%

Global Investment Grade

97 bps

0 bps

1.3%

1.6%

Euro Investment Grade107 bps

1 bps

0.7%

1.2%

US Investment Grade

92 bps

0 bps

1.7%

1.8%

UK Investment Grade95 bps

0 bps

0.8%

0.7%

Asia Investment Grade149 bps-3 bps0.8%

3.3%Euro High Yield

359 bps

0 bps

0.6%

3.9%

US High Yield

319 bps-8 bps

1.1%

3.7%

Asia High Yield

598 bps-3 bps

1.0%

10.9%

EM Sovereign

342 bps-2 bps

1.6%

3.5%

EM Local

6.5%-11 bps2.9%-1.0%

EM Corporate

273 bps-1 bps0.9%

4.8%

Bloomberg Barclays US Munis

3.6%-10 bps

0.6%

0.2%

Taxable Munis

5.0%-10 bps

1.6%

0.4%

Bloomberg Barclays US MBS

42 bps-4 bps1.8%

0.8%

Bloomberg Commodity Index

236.52

-1.6%

0.0%

5.1%

EUR

1.0910

0.6%

1.8%

-1.2%

JPY

157.931.8%

1.9%-10.6%

Emerging Markets

GBP

1.2988

1.3%

2.7%

2.0%

Kris Moreton

Source: Bloomberg, ICE Indices, as of 12 July 2024. *QTD denotes returns from 30/06/2024.

Structured Credit

Chart of the week – US Core CPI annual growth rate (2004-24)
7Asian Fixed Income

62

Source: Bloomberg, Columbia Threadneedle Investments, as of 15 July 2024.

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01/01/2024

01/04/2023

01/07/2022

01/10/2021

01/01/2021

01/04/2020

01/07/2019

01/10/2018

01/01/2018

01/04/2017

01/07/2016

01/10/2015

01/01/2015

01/04/2014

01/07/2013

01/10/2012

01/01/2012

01/04/2011

01/07/2010

01/10/2009

General Fixed Income

01/01/2009

Sarah McDougall

01/04/2008

001/07/2007

1
01/10/2006

General Fixed Income

301/01/2006

Gary Smith

401/04/2005

Responsible Investments
Investment Grade Credit

501/07/2004

Charlotte Finch

Core CPI (y/y %)Justin Ong

In Credit  15 July 2024

Macro / government bonds
The fall in yields last week was most pronounced in the US.
The cause of this was a lower than expected reading from the Consumer Price Index (CPI). CPI
fell 0.1% during June, on the back of falls in the price of energy and core goods. Core CPI(which excludes the volatile energy and food sectors) only rose by 0.1% (see chart of theweek). Parsing the economic data there was good news on shelter, which only rose by 0.2%. It
was as if the dominoes had started to fall for a first cut in US interest rates. All core markets saw
yields gap lower on the news. However, Producer Price Index (PPI) data publishedsubsequently did not follow the ‘lower inflation’ script. PPI Final Demand rose 0.2% in June.
Breaking the data apart revealed the conundrum of all major economies – the gap between
services and manufacturing. Final demand services rose 0.6% in June while final demand
goods fell 0.5%. However, the impact on price action in the US treasury market was muted. The
majority of the rise could be attributable to higher margins in a relatively narrow subset of thebroader economy, machinery and vehicle wholesaling. The combination of the CPI and PPI
outturns should translate into a favourable Personal Consumption Expenditure figure (the Fed’s
favoured inflation measure), which should provide it with scope to cut interest rates at its
September meeting.
Jay Powell, Fed Chair, spoke to Congress for the semi-annual monetary policy report. He said
that elevated inflation was not the only risk, reinforcing the message that the labour market is ofequal importance in determining monetary policy. Powell characterised the labour market as
strong but not overheated and confirmed the Fed would need to see more evidence that
inflation was moving sustainably towards 2% before it could take action. Pricing in the swaps
market is almost fully pricing in a quarter point rate cut for September and the probability of afurther quarter point rate cut by December 2024. On Sunday came the attempted assassinationof Presidential Candidate Trump. Iconic pictures of his survival and a raised fist in the air look
likely to underpin his support, underlining the attractiveness of yield curve steepening strategies
in the US. This reflects an electoral programme that is likely to be fiscally expansionary.
In the UK, we had monthly GDP which rose 0.4% in June compared to a flat reading in May.
One central takeaway from the data was that growth in services continued to outpace that ofmanufacturing. Context for the decision-making process at the Bank of England (BoE) wasprovided through a speech by BoE Chief Economist, Huw Pill. While admitting that there had
been good progress on inflation, he highlighted the fact that services price inflation and wage
growth continue to point to uncomfortable strength in underlying inflation dynamics. Pill’smessaging, alongside the strength of recent data, made markets question the pace of monetaryeasing, resulting in the underperformance of UK government bonds versus other markets. Last
week, we switched out of the UK into Australia, whose market has been trading at what weconsider oversold levels, and the US, which is edging closer to its first cut in monetary policy.
There was not much macro news in Europe to move markets. One idiosyncratic story to remainin the news is France. The left and centre saw off the challenge from the far right in the final
round of voting. But uncertainty remains. The French political system will either have to support
an unstable minority left-wing government or a broader coalition of the centre and left. Either
option is likely to prove fiscally expansionary. The EU has already triggered an excessive deficit
procedure, which means the French government will have to agree a plan to reduce its deficit
and lower spending. Ongoing political uncertainty meant that the yield spread on French bonds
over Germany remains elevated at 0.66%. We retain a short position in France, although wehave started to pare back the size of this position. Other positions on the Global Rates desk
include a strategic short position in Japan and long duration tilts in both the US and theeurozone.

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In Credit  15 July 2024

Investment grade credit
It was a very quiet week for investment grade spreads ahead of the summer lull. Global spreads
remained unchanged at 97bps only a few basis points wide of the year’s tightest spreads.
The week ended with US bank results from JP Morgan, Wells Fargo and Citibank. Earnings
remain strong but margins have peaked and are declining. Asset quality is weaker than normal
as measured by Cost of Risk though the pace of deterioration has slowed. Markets businesses
were resilient through the last quarter and high levels of capital are noted in the sector.

High yield credit & leveraged loans
US high yield valuations tightened over the week following a benign CPI reading, fund inflows,
and light new issuance.
The ICE BofA US HY CP Constrained Index Returned 0.88% and spreads were 8bps tighter.
The yield-to-worst of the index declined 0.19% to 7.67%. According to Lipper, retail high yieldfunds reported a five-week high $676m inflow following consecutive weekly outflows. In loans,the average price of the Credit Suisse Leveraged Loan Index was unchanged at $95.8. Retailloan funds saw a $444m contribution.
European high yield had another solid week of performance returning +28bps even as yields fell(-7bps to 6.88%), but spreads remained unchanged at 359bps. It was also another week ofcompression, though at the margin, as CCCs outperformed but modestly compared to thehigher rated BBs and Bs. Flows reverted to positive after two straight weeks of outflows. A small
inflow of about €80m was seen for both ETFs and managed accounts. The heavy primarymarket continued with €4.2bn coming to the market, a mix of both refinancings and acquisition
financing, bringing the YTD gross figure to €71.9bn.
There was more negative news for the debt collector space as Lowell was downgraded toCCC+, with negative outlook, by S&P and to Caa1, negative outlook, by Moody’s. The rating
agencies cited high leverage and limited access to financial markets as well as concern about
the increasing likelihood of a distressed debt exchange. During the same week a reorganization
was reported for Intrum, the Swedish debt collector company.
In company news, Grifols, the Spanish health care company may be going private. The press
reported that the family and Brookfield, a private equity group, were in discussions to launch apublic take over to take the company private. The market responded positively to the news withboth equity and bonds rallying. However, within 48 hours, the market gave back some of thegains as Moody’s announced that it was withdrawing its rating (Caa2) for Grifols due to“insufficient or otherwise inadequate information to support the maintenance of the ratings.” For
now, Fitch and S&P (CCC+, B-, respectively) continue to provide a rating.
In LME (liquidity management exercise) news, it was announced that Altice had moved some ofthe proceeds of the Altice Media sale (€1.55bn) into an entity that “sits above Altice France’soperations”. This comes as talks between creditors and the corporate are supposed to officiallystart in the coming week. Watch this space.

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Asian credit
The June export growth in China came in above expectation while import growth was negative.
Exports rose 8.6% y/y in June (May: +7.6%), which was partly explained by a low base and theresilient exports for motor vehicles. However, the imposition of EU duties from early July could
impact the export volume over the coming months. The negative import growth reflects theprevailing environment of soft domestic consumption. In June, the CPI reading was tepid with aprint of +0.2% y/y (May: +0.3%), lower than market expectations of a larger increase in inflation.
PPI remained in deflation territory at -0.8% y/y (May: -1.4% y/y), weighed down by weakdomestic demand.
The Chinese real estate sector continued to be challenging despite various policies to ensure
the delivery of pre-sold homes and to shore up homebuyers’ confidence. New home prices in 70cities (excluding state-subsidized housing) fell 0.67% m/m in June. That said, this is a marginal
improvement from the decline of 0.71% m/m in May, helped by home prices in Tier-1 cities.

Emerging markets
US data once again provided some relief for emerging market hard currency bonds last week.
The index returned +1.04% with US treasuries the main driver of positive performance. EM
spreads also helped tightening 3bps to 389bps. High yield sovereign bonds outperformed
investment grade with Venezuela and Ukraine seeing the highest returns. As US CPI came inslightly lower than expected, market participants believe a Fed cut will happen in September,which gives EM central banks more confidence to either commence or continue their easing
cycles. This week policy makers in South Africa and Indonesia meet where expectations arethat rates will be held.
The renewed positive sentiment has fed into fund flow data with EM bond funds enjoying+$208m in inflows over the week, led by hard currency funds as local currency funds continue
to see outflows.
Pakistan secured a Staff Level Agreement with the IMF for a $7bn 3-year EFF programme. This
will be welcome news for the government following the implementation of unpopular, but muchneeded, reforms in order to satisfy the IMF’s criteria. Some of the reforms included higher taxes
and increased energy prices.
Saudi Arabia’s oil giant Saudi Aramco issued $6bn of debt across three tranches, 10, 30 and 40years. In the UAE, there was an inaugural euro issuance of €500m from the emirate of Sharjah,
who issued a sustainable 6.5 year bond. Outside of the Middle East, Turkey issued a $1.75bn
8-year bond yielding 7.3%.

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CTEA6790798.1 Issued July 2024 | Valid to end September 2024

In Credit  15 July 2024

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