Information for investment professionals

In Credit
12 August 2024

In, Out, Shake it all about
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

3.96%

17 bps3.1%

2.3%

German Bund 10 year

2.25%

8 bps

2.3%

0.1%

UK Gilt 10 year

3.96%

13 bps

2.4%

-0.6%

Japan 10 year

0.85%

-10 bps

1.3%

-2.0%

Global Investment Grade109 bps

0 bps

2.5%

2.7%

Euro Investment Grade120 bps

2 bps

1.8%

2.3%

US Investment Grade105 bps-1 bps2.8%

2.8%

UK Investment Grade101 bps

4 bps

1.7%

1.6%

Asia Investment Grade162 bps-12 bps

1.9%

4.5%

Euro High Yield

398 bps-1 bps

1.2%

4.4%

US High Yield

349 bps-23 bps

1.9%

4.5%

Asia High Yield

600 bps

0 bps

1.7%

11.6%

EM Sovereign

360 bps-12 bps

2.4%

4.3%

EM Local

6.3%

0 bps

4.1%

0.2%

EM Corporate

286 bps-7 bps

1.9%

5.8%

Bloomberg Barclays US Munis

3.5%

7 bps

1.4%

1.0%

Taxable Munis

4.8%

18 bps

3.6%

2.3%

Bloomberg Barclays US MBS

44 bps

2 bps

3.5%

2.5%

Bloomberg Commodity Index

228.81

0.9%

-4.8%

0.0%

EUR

1.0928

0.1%

1.9%

-1.1%

JPY

148.19

-0.1%

9.7%

-3.8%

Emerging Markets

GBP

1.2774

-0.3%

0.9%

0.2%

Kris Moreton

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

Structured Credit

Chart of the week – 30 Day Federal Funds Futures

Justin Ong
Asian Fixed Income

94.78
94.76

Charlotte Finch

94.74

Responsible Investments
Investment Grade Credit

94.72
94.7

General Fixed Income

Sarah McDougall
General Fixed Income

94.675

94.68
94.66

12/07/2024
15/07/2024
15/07/2024
16/07/2024
18/07/2024
22/07/2024
23/07/2024
24/07/2024
25/07/2024
29/07/2024
29/07/2024
30/07/2024
31/07/2024
31/07/2024
01/08/2024
01/08/2024
02/08/2024
02/08/2024
02/08/2024
05/08/2024
05/08/2024
05/08/2024
06/08/2024
06/08/2024
06/08/2024
07/08/2024
07/08/2024
08/08/2024
08/08/2024
08/08/2024
09/08/2024
09/08/2024
12/08/2024

Gary Smith

Source: Bloomberg, Columbia Threadneedle Investments, as of 12 August 2024.

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In Credit  12 August 2024

Macro / government bonds
Last week the market priced out some of the Fed rate cut euphoria that followed the weak NonFarm Payrolls number release. There was a sense that the market had gone too far, too fast,
helped by thin summer trading conditions (see Chart of the week).
The move to higher yields was nudged by the initial jobless claims. Claims came in at 233k – adrop of 17k on the previous month. Two-year US Treasury yields gapped 7bps higher on thenews to 4.04%.
Fed speakers Daly and Barkin both made the point that it was too early to tell whether thelabour market was normalising. All this contributed to lacklustre auctions of 10-years and 30year US Treasury bonds.
In other markets, the Reserve Bank of Australia kept rates on hold at 4.35%, maintaining ahawkish stance. Government bond prices weakened on the news. The RBA justified its stanceby pointing to the persistence of elevated inflation levels.
We saw the minutes of the Bank of Japan’s meeting last week, which pointed to an eventual
further tightening of monetary policy. Sustained wage hikes and the continued evidence of costs
being passed through are expected to keep upward pressure on Japanese inflation anddomestic bond yields.
The global rates desk increased its long duration position ahead of the Non-Farms Payroll
number and took some profits on Monday. However, the team maintains a structural long
duration position.

Investment grade credit
Spreads in core markets widened in reaction to the weak US data last week. Global IG spreads
widened to 116bps from 109bps before calming back down to where it started the week. In
Europe, spreads reached 127bps from 118bps, but retracted back down to 120bps. Lastly, in
the UK, spreads widened less dramatically from 97bps to 102bps, and closed on Friday at
101bps.
New issuance last week was low, owing to market volatility.T-mobile postponed a US deal early
on in the week before Meta Platforms Inc came to market on Wednesday as things were coolingoff. This was followed by euro deals from Coca-Cola (€1bn) and VW (€500m) igniting themarket back to life.

High yield credit & leveraged loans
US high yield spreads widened to YTD highs early in the week as investors digested last week’s
soft labour market data. Spreads ultimately recovered roughly half of the widening, as
measured from late-July levels, as the week progressed with dovish BoJ commentary andadditional economic data points that soothed concerns somewhat. The ICE BofA US HY CP
Constrained Index returned 0.30% and spreads were 24bps tighter. The yield-to-worst of theindex ended largely unchanged at 7.65% after briefly approaching 8.00% intra-week. According
to Lipper, retail high yield funds saw $1.2bn of outflows over the week, largely concentrated
within ETFs. This was the largest outflow in four months.
Similarly, the average price of the Credit Suisse Leveraged Loan Index recovered
approximately half of its drawdown from late-July levels over the week, increasing $0.45 to$95.5. Retail loans funds saw a $3.1bn outflow over the week. This was the largest outflow
since March 2020 and approximately 80% concentrated in ETFs.
In spite of the market volatility last week, European High Yield’s initial spread widening at thestart of the week reversed, ending up doing a round trip and finished the week largely
unchanged with spreads at 398bps (-1bps) and yields at 6.88% (+0.01%). Performance for the
week was a modest positive (+0.08%), with further decompression seen as CCCs

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In Credit  12 August 2024

underperformed higher rated credits, returning a negative performance (-0.57%). Sterling highyield also underperformed EHY. There was a small outflow from EHY, solely from managed
accounts as ETFs still experienced modest inflows. The summer lull has started with primarymarkets closed last week: they are not expected to re-open until September.
JaguarLandRover was upgraded by Moodys to Ba2 from Ba3 with outlook positive, citing“significantly improved credit metrics on the back of its consistently strong operating
performance over the past two years, which has continued with the first quarter results…”
For Thames Water, the risk of the utility losing its licence due to the loss of its IG rating has
been put to rest, for now. Ofwat, the regulator, has provisionally agreed to Thames’ proposal toregain its credit rating to put the issuer back into compliance with the licence requirements.
Thames has agreed to take steps to deliver an equity raise by securing backing from investors,
as well as the addition of two experienced independent non-executive directors who willsupervise its turnaround plans and report back to the regulator.

Structured credit
The Agency MBS sector backed up last week alongside other duration sensitive asset classes
on a resumption of risk appetite. As the week came to a close, spreads widened slightly, andrates rose nearly 20bps reversing the positive trend earlier in the week. 30-year mortgages
underperformed 15-year mortgages and higher coupons outperformed lower coupon bonds.
In Non-agency RMBS, spreads widened across most sectors: Non-QM 5-10bps, CRT 1030bps, 2nd liens: 5bps. In ABS, the primary market commenced its August slowdown as it
priced just $3.4bn this week, up from a single $536m deal in the prior week. One deal was
postponed due to unfavourable market conditions following the release of last week’s payroll
numbers. We have about $12.5n in the new issue pipeline for this week. Meanwhile, thesecondary market widened on the payroll release on Friday. As is typical in times of stress, we
saw the offered side widen by about 5bps, the bid/offer spread widen and bids on BWIC’s about
10bps wider. Some accounts viewed this as a buying opportunity as it was not a credit event
and added paper at more attractive levels.
The CLO primary market was busy with seven new issue deals ($3.28bn), 14 resets ($7.42bn),
and 2 refis ($0.62bn) pricing as of EOD Thursday. YTD new issue volume is up to around$120bn, which is 85% higher y/y and remains on pace with 2021, which was a record issuanceyear. Primary spreads felt a bit soft with the risk off tone to start the week with but held in
relatively well. In secondary, there was a fair amount of spread weakness across the credit
stack. AAA/AA spreads widened 10bps, A spreads widened 20bps, BBB spreads widened
25bps, and BB spreads widened 50bps. BWIC volume for the week was the highest we haveseen since the last week in June.

Asian credit
The export data in China for July was underwhelming and implies a weakening external
environment for global demand. Export growth in US dollar terms decelerated to 7% in July
(June: 8.6%) against the consensus expectation of an increase. The slowdown in export growth
was due to the weaker demand in Asia, notably Japan and South Korea. On another hand,
import growth was 7.2% y/y in July, higher than consensus.
Hon Hai reported a positive trend in monthly revenue in July, driven by strong demand for AI
servers and computing components. Its cloud business posted the strongest y/y growth and thecompany maintains its Q3,24 revenues target of positive y/y and q/q growth.

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In Credit  12 August 2024

Emerging markets
A volatile week with EM debt taking its cue from the deterioration in broader risk sentiment on
Monday before subsequently rallying back throughout the remainder of the week. Spreads
finished the week 12bps tighter and back to unchanged relative to pre-payrolls levels at the startof August. Despite the volatility, EM Debt has delivered a 0.58% total return month-to-date on
the move lower in rates, while EM local currency debt has been the standout with a 1.75%
return so far in August.
While subject to the broader whims of the macro environment, EM did see a couple of positive
idiosyncratic developments. The IMF released a statement on its progress with El Salvador,
indicating a higher likelihood of a funded programme coming together this year than previously
expected, which saw the country's bonds as one of the main outperformers on the week up
3.4%. Additionally, Ukraine launched its exchange and consent solicitation as the final step torestructuring its $23bn outstanding Eurobond stock, which should proceed relatively smoothly
given a market-friendly approach by the authorities.
Despite the market turmoil there were several central banks cutting rates over the week, with
Mexico, Peru, Romania, and Kenya all easing by 25bps. Most interesting was the decision by
Mexico, where the unwinding of the MXN carry trade cast doubt on the bank's willingness to
cut. Ultimately the bank sided with downside risks to growth amidst high real rates as
justification for cutting combined with forward guidance for additional easing in coming months,
although it was a split 3-2 decision.
For EM, macro remains in the driver's seat over the near-term and with credit spreads
remaining resilient at the tighter-end of recent ranges, investors will likely remain cautious until
markets achieve greater clarity over the state of both US monetary policy and global growth.

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In Credit  12 August 2024

Fixed Income Asset Allocation Views
12th 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

◼

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 a bit but still remain at tight, unattractive
levels. Economic data has weakened but hasn’t yet translated
into any significant spread widening. Current valuations limit
the spread compression upside and are misaligned withpotential market volatility.
The group remains negative on credit risk overall, with an
upgrade to Agency MBS to +2.
The CTI Global Rates base case view is that the hiking cycle isover, and the start of the cutting cycle is uncertain. With therecent CPI prints, the impetus is on the fed to bring the timing
and the magnitude of cuts forward.
Uncertainty remains elevated due to sensitive monetary andfiscal policy schedules and elections in various countries.

€

P

Currency

Emerging
Markets Local(rates (R) andcurrency (C) )

◼

Long

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
Underdenominated) weight -2

◼

-1

0

Over+1 +2 weight◼
◼

◼

Investment
Grade Credit

Underweight -2-10Over+1 +2 weight

◼

◼

◼

High Yield
Bonds andBank Loans◼
◼

Underweight -2-10Over+1 +2 weight◼

◼

Agency MBS◼
◼

Underweight -2

Structured
Credit
Non-Agency
MBS & CMBS

-1

0

Over+1 +2 weight

◼

◼

-1

0

Over+1 +2 weight

◼

◼

◼

Commodities◼
◼

Underweight -2-1

CTEA6885204.1 Issued August 2024 | Valid to end October 2024

0Over+1 +2 weight◼

Spreads have remained stable but are near record lows. The
group is taking down credit risk because of flat spread curves
and less spread compression upside.
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.

◼

Spreads have remained stable but tight since last month.
Anticipate credit selection will be the performance differentiatorin 2024. Looking to avoid defaults/distress, focusing on credit
recovery and deleveraging theses.
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 flat to 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.
Constructive view on fundamentals over longer time horizon.

◼

◼
◼
◼

◼

◼
◼
◼
◼

◼

◼
◼

◼
◼
◼

◼

Underweight -2

EMD spreads have remained stable this month, following theimprovement in distressed credit and stability in GCC despite
geopolitical risk amid changes after the elections.
Investment Grade spreads are at historical tights while High
Yield still offers some 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.

◼
◼
◼

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.
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.

Neutral outlook because of decent fundamentals and relval inselect high quality Non-Agency RMBS, and ABS.
RMBS: MoM spreads remain tight. Delinquency, prepayment,
and foreclosure performance remains strong for prime
borrowers; seeing small increase in delinquencies for nonprime borrowers.
CMBS: There is ongoing pressure, particularly on AAA
securities. Non-office sectors, however, perform as expectedwith the overall market sentiment improving.
CLOs: Despite 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 stable, lower quality borrowers underperform.
Federal student loan payments near ’18 / ‘19 levels with ~75%of borrowers active.

◼

◼

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

◼

◼

◼

In Credit  12 August 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 12.08.2024, unless otherwise stated.
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