Information for investment p rofessionals

In Credit
19 August 2024

What goes up must come downMarkets at a glanceDavid OliphantExecutive Director,
Fixed Income

Contributors

Price / Yield/ Spread

Change1 weekIndex QTD
return*Index YTD
returnUS Treasury 10 year

3.88%

-6 bps3.5%

2.7%

German Bund 10 year

2.26%

3 bps

2.1%

0.0%

UK Gilt 10 year

3.94%

-1 bps

2.7%

-0.3%

Japan 10 year

0.89%

4 bps

1.3%

-2.0%

Global Investment Grade104 bps-5 bps3.1%

3.4%

Euro Investment Grade116 bps-4 bps

1.8%

2.4%

US Investment Grade98 bps-7 bps3.7%

3.8%

David Oliphant

UK Investment Grade

99 bps-2 bps2.0%

1.9%

Investment Grade Credit

Asia Investment Grade158 bps-4 bps2.3%

4.9%

Euro High Yield

379 bps-19 bps

1.7%

5.0%

US High Yield

329 bps-20 bps

2.6%

5.3%

Asia High Yield

595 bps-5 bps

2.1%

12.1%

EM Sovereign

351 bps-8 bps3.4%

5.3%

EM Local

6.3%-2 bps5.2%

1.3%

EM Corporate

281 bps-5 bps

2.5%

6.4%

Bloomberg Barclays US Munis

3.5%-2 bps

1.6%

1.2%

Taxable Munis

4.8%-4 bps4.3%

3.0%

Bloomberg Barclays US MBS

42 bps-2 bps4.0%

3.0%

Bloomberg Commodity Index

229.02

0.3%

-4.6%

0.4%

EUR

1.1069

1.0%

2.9%

-0.1%

Simon Roberts
Macro/Government Bonds

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

JPY

146.31

-0.7%

9.0%

-4.5%

Emerging Markets

GBP

1.2989

1.4%

2.4%

1.7%

Kris Moreton

Source: Bloomberg, ICE Indices, as at 16 August 2024. *QTD denotes returns from 30 June 2024.

Structured Credit

Chart of the week: The rise and fall of market volatility – LTM.

Justin Ong

Charlotte Finch
Responsible Investments
Investment Grade Credit

Gary Smith
General Fixed Income

VIX index

Asian Fixed Income

45
40
35
30
25
20
15
10
5
0

Sarah McDougall
General Fixed Income
Source: Bloomberg & Columbia Threadneedle Investments as at 19 August 2024.

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In Credit  19 August 2024

Macro/government bonds
Last week saw a shift in the market narrative from one of recession to greater economic
resilience in the US. The Producer Price Index came in weaker than expected at 0.1% for July,
while headline CPI for July came in at 0.2%, which was in line with market expectations. The
rise in CPI over the previous month reflected an increase in core services inflation, and inparticular housing costs. The data at this point did little to challenge the market narrative that
recession remained a distinct possibility. Rather, debate in the market focused on whether theFederal Reserve would stick to a 25bps interest rate cut at its September meeting, or whether a
50bps cut could even be warranted.
The steady drift lower in US Treasury yields, which had so far characterised market price action,
was interrupted by the publication of stronger than expected US retail sales, causing Treasury
yields to gap wider across maturities. These came in at 1%, with the market expecting 0.4%.
The data painted a picture of a resilient US consumer, and parsing through it the biggest
increases in retail sales were in general merchandise and food and beverage stores, pointing tospending on essentials rather than luxuries.
On top of this unexpected data point, continuing claims and new jobless claims surprised to thedownside. This added to a narrative of economic resilience and away from recession. A rangeof Fed speakers made comments, from Raphael Bostic at the Atlanta Fed to Mary Daly at the
San Francisco Fed, who reiterated a similar message that new information on inflation andemployment would inform their discussion at their next meeting. This allowed the Fed tomaintain some optionality despite near-market unanimity on a September rate cut.
Price action in the US set the tone for bond markets globally. The traditional summer lull inEuropean markets meant there was no market moving data or comments of note last week inthe region. In the UK , CPI fell -0.2% on the month, underlining disinflationary forces at play in
the UK economy. UK retail sales, although higher than the previous month, were still lower thanthe market had expected at 0.5%. UK GDP for Q2 came in 0.6%, causing no surprises.
Strength could largely be attributed to the services sector. The UK economy in Q2 grew fasterthan European economies, only underperforming the US and Japan. The data also hinted at theneed for a more cautious approach from the Bank of England MPC as it continues to weigh thetrade-off between dampening inflation and slowing growth. The market has priced in the next
UK rate cut for November with a 70% probability of a further cut in December.
Outside of core markets, the Reserve Bank of New Zealand (RBNZ) cut interest rates from
5.5% to 5.25%. It justified its actions based on falling services inflation and declining economic
growth.

Investment Grade credit
After the excitement of early August and fears of a US recession post the employment data, wehave had another week of realtive calm in credit markets. Global IG spreads ended July with aspread of 100bps over government bonds, before spiking wider to 116bps in the first week ofthe month. But last week saw spreads nearly back to levels seen at the end of July at 104bps.
This year spreads remain tighter, by around 14%-15% in Euros and Sterling. The US market
has lagged with spreads merely 6% better. Shorter-dated credit has also outperformed as credit
curves have steepened. Sector wise, Real Estate, Banking and Insurance have led the way
globally with Media spreads actually wider and Healthcare unchanged.
Valautions remain on the rich side in aggregate, with spreads trading inside both short- andlonger-term averages. This is more pronounced for the US dollar market than for eurodenominated credit.

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In Credit  19 August 2024

High yield credit & leveraged loans
US high yield valuations continued to rebound from the early-August volatility as economic data
were generally supportive. Meanwhile, July’s CPI report was in line with expectations,
essentially locking in a cut at the September FOMC. The ICE BofA US HY CP Constrained
Index returned 0.77% and spreads were 21bps tighter. The index yield to worst declined to
7.42%, its lowest level since February 2022. According to Lipper, US high yield bond retailfunds saw a $1.2 billion outflow for the week, which was entirely driven by ETFs.
In floating rates, the average price of the Credit Suisse Leveraged Loan Index increased slightly
to $95.6 having recovered most of the drawdown from early August. Retail loans fund outflows
moderated with a $670 million withdrawal following a $3.1 billion outflow over the prior week.
European HY benefitted from a “risk on” atmosphere last week as risk assets rallied. EHY
spreads contracted 19bps back to 378bps, while yields fell – albeit only by 11bps to 6.77%.
Compression returned to the market as CCCs outperformed higher rated credits, yielding
almost two times the return of the overall market’s 0.53% return for the week. Market flows weremodest with a small outflow (€67 million) across both ETFs and managed accounts. The
primary market was closed for the second week in a row with the expectation that it will remain
shut until September.
In credit rating news, S&P upgraded Warner Music Group to BBB-, making it the latest risingstar. The credit rating cited that the company is “well positioned to benefit” from the musicindustry’s “strong growth fundamentals”. The business is still rated Ba2 by Moodys. There was,however, bad news as building materials manufacturer Pfleiderer was downgraded by Moody’s
to SD (Selective Default), with the rating citing that the corporate “has not given ‘adequate
compensation’ to lenders for a maturity extension on its high yield bonds.”
In general, 2Q reporting was generally “meeting and beating” expectations. The Real Estate
sector is looking like things may have finally bottomed. Heimstaden Bostad reported that
unsolicited interest in disposals are now reaching valuations that management may be willing toconsider. Rent growth and occupancy are also showing improvement. There was also similarnews for Grand City Properties.
However, there is some softness in other areas with Leisure starting to show some signs ofconsumer weakness as Merlin reported 2Q revenue down 6% and EBITDA down 16%, even as
the number of visitors rose. Travel continues to hold up well with Tui Group experiencing an
acceleration in bookings resulting in the firm beating EBIT expectations with revenue up 9.5%.
We are hearing that investment bankers are being kept busy over summer working on M&A
transactions. For the HY sector this is usually an early indicator of bonds coming to market.
However, this time around this may not be the case as we understand that issuers are looking
to finance via the private market and in size. This was seen in the recent Stonegate financing
where the corporate raised £1.6 billion via private credit. This shows issuers have alternative
ways to do financing.

Structured Credit
It was another good week for US Agency Residential mortgage-backed securities (RMBS). The
sector was up 47bps on slightly lower rates and tighter spreads. The available mortgage rate
drifted back to May 2023 levels, around 6.9%, creating some incentive for the highest cohort ofmortgagees at circa 8% to submit their refinancing applications.
Non-agency RMBS experienced more new issuance than expected with five deals pricing for$1.8 billion. BWIC volumes were less than $800 million and dealers net sold credit as of Friday
morning. Gross RMBS issuance year-to-date has reached around $82 billion, and in line to beatlast year’s total issuance by more than $30 billion – largely coming from higher issuance in NonQualified Mortgages, Closed-End Seconds, Jumbo Prime Mortgages and HELOCs (HomeCTEA6934488.1 Issued August 2024 | Valid to end November 2024

In Credit  19 August 2024

equity lines of credit). Spreads in the secondary market were largely unchanged across subsectors of residential on relatively light volumes. New issuance in asset-backed securities isbeginning its August tapering, as we priced just $7.2 billion last week, which were wellabsorbed. Spreads also firmed up in the secondary market.

Asian Credit
In China, Q3started with a weak tone as demonstrated by the July activity data. Industrial
production (IP) growth decelerated to 5.1% year-on-year in July, compared with 5.3% in June
year-on-year, with the property-related sector the key overhang on steel and cement output.
The production of crude steel shrank to 82.9mt, according to the National Bureau of Statistics,
which was down 9.5% month-on-month and down 9% year-on-year. Most of the declinematerialised in the second-half of July as the expectation for more government support was
tamped down after the Third Plenum. Cement production also decreased by 12.4% year-onyear in July. Additionally, FAI (fixed asset investment) growth eased to 1.9% year-on-year in
July, compared to 3.6% year-on-year in June, with weakness in the manufacturing and property
sector. This was partly compensated by a pick-up in infrastructure investment. Headline retailsales growth was better at 2.7% year-on-year in July, up from 2% in June. Overall, theconsumption environment continues with retail sales growth hovering below 3% for the second
consecutive month.
In Thailand, the Constitution Court dismissed SretthaThavisin (Pheu Thai Party) as prime
minister after ruling he violated moral and ethical standards by appointing a minister with aprevious criminal conviction. Paetongtarn Shinawatra of the same political party has been
elected PM by the House of Representatives. While further turmoil is averted for now, thepolitical landscape in Thailand remains tense. The reformist opposition party (Move Forward
Party), which was also dissolved by the Constitution Court last week, has regrouped as thePeople’s Party.
Bharti Global, which is the international investment entity of Bharti Enterprises, will acquire a
24.5% stake in BT Group from Altice UK. Bharti Enterprises will first buy a 9.99% stake,followed by an additional 14.5% after it obtains regulatory approvals.

Emerging markets
It was a week of relative calm for EM hard currency debt markets, as is expected in midAugust. Spread tightening of 9bps (EMBIG) and 7bps (CEMBI) was driven by top performers
Ecuador, Argentina and Kenya, with weakness from Lebanon and Ukraine.
Primary markets remain quiet after the flurry of Middle Eastern issuance last month, although
there are rumours that Kazakhstan may be coming back to the market before the end of theyear with a US dollar-denominated bond for the first time since 2015.
Ukraine’s new debt service profile significantly eases the external repayment burden, and a
post-war recovery secenario would see a rapid growth rebound driven by reconstruction and EU
access, leaving us cautiously optimistic. Ukranian corporates, however, are highlighting
increased power import costs due to a weather-induced demand spike in Europe. This isdampening the improvement seen from the reopening of the Black Sea ports routes.
Elsewhere, China is reducing steel output due to a steep drop in domestic demand. This has
been cited by Baowu Steel, the country’s largest steel producer, as a steel sector downturn that
could be worse than that seen in 2008 and 2015. If this is a correct reading, it is something tokeep an eye on with regards to the implications for the broader Asia steel complex.

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Responsible Investments
Goldman Sachs Asset Management business has disclosed it is leaving the Climate Action
100+ initiative (CA100+). In February this year, JP Morgan, BlackRock, State Street Global
Advisors and PIMCO all left the initiative as, broadly, they felt their own internal engagement
initiatives were more aligned to their investment activities.
The Goldman Sachs decision centres around a similar feeling, in addition perhaps tooverwhelming pressure as a US bank from Republican Party comments and the anti-ESG
movement that has ramped up in light of the upcoming presidential election.
The CA100+ initiative focuses on collective engagement efforts targeting corporates around theworld to better their climate strategies. Currently, the initiative has more than 600 members withapproximately $50 trillion AUM, according to CA100+.

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In Credit  19 August 2024

Fixed Income Asset Allocation Views
19th August 2024
Strategy and positioning(relative to risk free rate)

Views

Overall Fixed
IncomeSpread Risk◼
◼

Underweight -2-10Over+1 +2 weight◼
◼

Duration(10-year)(‘P’ = Periphery)

¥
Short

-2

-1

0

◼

$
+1 +2

Long

◼

Longer yields to be captured by long-run structural downtrends
in real yields
Inflation likely to normalize over medium term, although someareas will see persistent pricing pressures◼

-1

0 +1 +2€ £$Underweight -2

-1

0
C

◼

◼
◼

Short -2

◼

◼

A$
EM
¥

(‘E’ = European
Economic Area)◼

Spreads have widened in recent macro volatility but remain on
the tighter side of history.
Credit fundamentals have remained stable despite rising
volatility and early signs of slowing in macro data and issuer
expectations.
The group remains negative on credit risk overall, despite
an upgrade to High Yield Credit to -1.
The CTI Global Rates base case view is that the hiking cycle isover, and the start of the cutting cycle is expected to be thenext Fed meeting. Uncertainty about the pace remains elevated
due to sensitive monetary and fiscal policy schedules and US
elections looming closer.

€

P

Currency

Emerging
Markets Local(rates (R) andcurrency (C) )£Risks to our views

Long

R

Over+1 +2 weight

◼

◼
◼
◼

Dollar has been supported by US growth exceptionalism anddepricing of the Fed while the ECB looks set to embark on a
cutting cycle.
Dollar likely to continue to be supported into year end, where a
Trump presidency looks most likely, and with it a return to tariffs
and America First policy.

Disinflation under threat but intact; EM central banks still ineasing mode.
Real yields remain high.
Selected curves continue to hold attractive risk premium.

▪

◼
◼
◼
◼

Emerging
Markets
SovereignCredit (USD
denominated)◼

Underweight -2-10Over+1 +2 weight◼
◼

◼

Investment
Grade Credit◼

Underweight -2-10Over+1 +2 weight◼

◼

EMD spreads have also widened this month, following theescalation in potential risk. Especially given the ongoinggeopolitical and economic uncertainties. Fundamentals havebeen downgraded after improvements in distressed areas.
Investment Grade spreads are near historical tights while High
Yield still offers idiosyncratic value.
Tailwinds: Stronger growth forecasts, Central bank easing,potential China stimulus, IMF program boost for distressednames.
Headwinds: higher debt to GDP ratios, wider fiscal deficits,
geopolitical and domestic political uncertainty, restructurings
slow.

◼

Spreads have widened, especially short and intermediate, but
long IG spreads remain near record tights.
Due to the tight spreads across the board, the compensation
for taking on additional risk, in seeking higher yields, seems
unattractive.
Global portfolios prefer EUR IG over USD on relval basis.

◼

◼
◼
◼

◼

◼
◼
◼
◼

High Yield
Bonds andBank Loans◼

◼

Underweight -2-10Over+1 +2 weight◼

◼

Agency MBS◼
◼

Underweight -2-10Over+1 +2 weight◼
◼

Structured
Credit
Non-Agency
MBS & CMBS◼
◼
◼

Underweight -2-10Over+1 +2 weight◼

◼

Commodities◼
◼

Underweight -2-1

0

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Over+1 +2 weight◼
◼
◼

Upside risks: the Fed achieves a soft landing
with no labour softening; lower quality credit
outlook improves as refinancing concerns
ease; consumer retains strength; end to Global
wars
Downside risks: Fed is not done hiking andunemployment rises, or the Fed pivots too
early and inflation spikes. Restrictive policy
leads to European recession. China property
meltdown leads to financial crisis. 2024
elections create significant market volatility.

Inflationary dynamics become structurally
persistent
Labour supply shortage persists; wage
pressure becomes broad and sustained
Fiscal expansion requires wider term premiumLong run trend in safe asset demand reverses
Central banks need to keep rates at terminal
for much longer than market prices, to thedetriment of risk and growth and to the benefitof the Dollar

Global carry trade unwinds intensify, hurting
EMFX performance.
Stubborn services inflation aborts EM easing
cycles.
Uptick in volatility.
Disorderly macro slowdown boosts USD on
flight-to-safety fears
Global election calendar (US, LATAM)
Weak action from Chinese govt, no additional
support for property and commercial sectors
China/US relations deteriorate.
Spill over from Russian invasion and IsraelHamas war: local inflation (esp. food &commodity), slow global growth.
Potential for the start of a new war in theconflict between Israel and Iran.

Tighter financial conditions lead to European
slowdown, corporate impact.
Lending standards continue tightening, evenafter Fed pauses hiking cycle.
Rate environment remains volatile.
Consumer profile deteriorates.
Geopolitical conflicts worsen operating
environment globally.

Spreads have widened but stabilised since last month. Spreads
are still implying lower defaults than the Columbia
Threadneedle research team.
Anticipate credit selection will be the performance differentiatorin 2024. Looking to avoid defaults/distress, focusing on credit
recovery and deleveraging stories.
Increased lender on lender violence and aggressive liability
management exercises further increase the risk in the
distressed and highly leveraged segment. We expect this to ,accelerate in the coming months.
Default forecasts for lower rated issuers, particularly in Europe,is deteriorating with default rates projected to go up.

◼

Spreads are still wide of historic long-term averages.
The decline in interest rate volatility since Fed signalled adefinite end to the hiking cycle has been a tailwind for MBS.
Fed’s position on cuts, in relation to the recent CPI prints, is
expected to be cautious.
Constructive view on fundamentals over longer time horizon.

◼

Neutral outlook because of decent fundamentals and relval inselect high quality Non-Agency RMBS, and ABS.
RMBS: Spreads remain tight. Delinquency, prepayment, andforeclosure performance remains.
CMBS: There is ongoing pressure even on AAA securities.
Outside of office and multifamily housing, however,
performance has remained healthy.
CLOs: Despite heavy new issue, spreads remain tight. Defaults
remain low but CCC bucket defaults are rising with lower
recoveries.
ABS: Spreads tighter MoM, prefer senior positions. Higher
quality borrowers have deteriorated somewhat, while lower
quality borrowers underperform. Federal student loan
payments remain a key uncertainty with continued legal noise.

◼

◼

Weakness in labour market
Consumer fundamental position (especiallylower income) weakens with inflation and Fed
tightening. Consumer (retail/travel) behaviour
fails to return to pre-covid levels
Student loan repayments weaken consumer
profile more than anticipated, affecting spreads
on a secular level.
High interest rates turn home prices negative,
punishing housing market.
Cross sector contagion from CRE weakness.

o/w sugar
o/w Zinco/w Gasoline
o/w Distillates
o/w Cocoa◼

Global Recession

◼
◼
◼
◼
◼

u/w natural gas
u/w corn
o/w leado/w silver
o/w soybean meal

◼

◼
◼

◼
◼
◼

◼

◼

◼

Lending standards continue tightening,
increasing the cost of funding.
Default concerns are revised higher on greater
demand destruction, margin pressure andmacro risks
Rally in distressed credits, leads to relative
underperformance
Volatility in the short end of the curve, eroding
potential upside where we are positioned forcarry.

Lending standards continue tightening evenafter Fed pauses hiking cycle.
Fed fully liquidates position.
Market volatility erodes value from carrying.
More regional bank turmoil leads to lower
coupons to underperform.

In Credit  19 August 2024

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