Information for investment professionals

In Credit
16 September 2024

The first domino…
Markets at a glance
Price / Yield/ Spread

Change1 weekIndex QTD
return*Index YTD
returnUS Treasury 10 year

3.65%

-6 bps5.5%

4.6%

German Bund 10 year

2.15%

-2 bps3.0%

0.8%

UK Gilt 10 year

3.77%

-11 bps

4.4%

1.3%

Japan 10 year

0.85%

-1 bps

1.6%

-1.7%

Global Investment Grade105 bps

0 bps

4.7%

5.0%

Euro Investment Grade118 bps

2 bps

2.6%

3.2%

US Investment Grade

99 bps

0 bps

5.8%

5.9%

UK Investment Grade101 bps

2 bps

3.2%

3.1%

Asia Investment Grade160 bps-1 bps3.8%

6.4%

Euro High Yield

376 bps

0 bps

2.6%

5.9%

US High Yield

337 bps-2 bps4.3%

7.0%

Asia High Yield

573 bps

12 bps

1.8%

11.7%

EM Sovereign

344 bps-4 bps

5.4%

7.3%

EM Local

6.1%-5 bps

7.1%

3.1%

EM Corporate

285 bps

3 bps

3.8%

7.8%

Bloomberg Barclays US Munis

3.3%-2 bps2.4%

2.0%

Taxable Munis

4.5%-5 bps

6.9%

5.6%

Bloomberg Barclays US MBS

38 bps-3 bps6.2%

5.2%

Bloomberg Commodity Index

229.72

2.7%

-3.7%

1.2%

EUR

1.1126

-0.1%

3.4%

0.3%

JPY

140.11

1.0%

14.2%

0.1%

Emerging Markets

GBP

1.3201

0.0%

3.8%

3.1%

Kris Moreton

Source: Bloomberg, ICE Indices, as of 13 September 2024. *QTD denotes returns from 30 June 2024.

Structured Credit

Chart of the week – The decline of 10-year US real yields – LTM

David 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

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

Gary SmithGeneral Fixed Income

Sarah McDougall
General Fixed Income

Source: Bloomberg, as of 16 September 2024.

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In Credit  16 September 2024

Macro / government bonds
The big debate in the US Treasury market last week was how great the magnitude of the firstrate cut would be: 25bps or 50bps. Yields on 10-year US Treasuries drifted lower over theweek; the US 10-year yield fell 6bps to 3.65%, while pricing in the swaps market reflected anincreased probability of a 50bps cut at the September FOMC meeting, edging higher from 27%
to 35%. There were no killer economic data points, however, which could provide a definitive
answer to the question as to how much the US Fed might cut by.
Out of the US, we had consumer price and producer price data. While headline CPI for August
came in line with market expectations at 0.2%, core CPI rose 0.3%. Driving the upside surprisein core CPI were higher shelter costs, which saw their biggest rise in the last seven months, aswell as volatile hotel and airfare prices. A similar trend was seen in producer price data for themonth of August. Producer price final demand data came in at 0.2%, while core PPI rose 0.3%,
which could largely be explained by strength in the services sector. The previous month’s core
PPI data was revised down from zero to -0.2%. While CPI and PPI data are used to create theCore PCE data series, which is the Fed’s favoured inflation gauge, it can be difficult to estimate
with certainty what the final number will be. Currently, the market is currently coalescingaround 0.2%. We also had initial and continuing claims data. Both data series fell in line withmarket expectations and did not move the dial in terms of market directionality.
We also heard from the European Central Bank (ECB), which drew no surprises when it cut theinterest rate on its deposit facility from 3.75% to 3.5%. The ECB published new inflation andgrowth projections, as part of its quarterly macroeconomic projections. Real GDP growth
outlook edged lower by 0.1% in the years from 2023 to 2026, while the ECB left its inflation
outlook broadly unchanged over the same period. Christine Lagarde (ECB President) made thefollowing points at the accompanying press conference. First, that interest rates were on adeclining, but not a predetermined path. Second, that disinflation was providing scope tomoderate monetary policy restriction, although lingering concerns remained about theelevated level of inflation in the services sector. Third, the ECB was in data dependent modeand not data point dependency mode. Finally, in terms of the balance of risks, growth
remained tilted to the downside, and inflation tilted to the upside. The day after the ratedecision, Lagarde admitted that there could be an interest rate cut in October if there was asignificant downshift in economic activity in the eurozone. Pricing in the swaps market put thebalance of odds on a quarter point rate cut for December. The September rate cut had little
impact on eurozone bond pricing, rather it was the continuing tussle in the US Treasury market
between adherents of the 25bps cut or the 50bps cut, which drove market price action.
In the UK, we had real GDP data for July, which showed no growth on the previous month.
Services output grew by 0.1% in July, which was offset by a 0.1% fall in production. In addition,manufacturing production declined 0.1% in July. At the margin, this increased the probabilityof a quarter point rate cut in November, alongside a further quarter point rate cut inDecember. This helped the UK to outperform other core markets on the week, with the 10year UK Gilt falling 12bps to 3.78%. Like the ECB, the Bank of England has been keen topromote a cautious approach to easing monetary policy, as it balances a slowing growth
outlook with still observable pricing pressures in the services sector.

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In Credit  16 September 2024

Investment grade credit
Credit spreads were little moved last week. Global IG spreads remain at 105bps according todata from ICE indices.
The market has had to digest a significant amount of issuance as companies seem keen toissue / refinance ahead of the US election.
Falling interest rates in Europe last week and expected falling rates in the US this week aresupportive for the market – but already discounted.
The auto sector continues to struggle with BMW, for example, pointing to weaker demand
from China as one reason to reduce its margin expectations. So while Global IG spreads arearound 8% tighter in 2024, auto spreads are unchanged joining media and healthcare asunderperformers. On the positive side, real estate, banking and insurance are the best
performing sectors globally this year by some margin. Real estate as a sector traded with aspread of around 285bps in late 2022 before embarking on a significant tightening to a level of126bps at the end of last week.

High yield credit & leveraged loans
US high yield bond total returns were again positive and primarily driven by lower interest
rates with an assist from continued retail fund inflows. The primary market reopened in force
with the largest week of new issuance since May with $11.4bn issued. The ICE BofA US HY CP
Constrained Index returned 0.42% and spreads were unchanged. The index yield-to-worst
declined to 7.19%, remaining around levels not seen in more than two years. According toLipper, US high yield bond retail funds saw a $633m inflow for the week. In floating rates, theaverage price of the Credit Suisse Leveraged Loan Index increased slightly to $95.7 in anenvironment of moderate outflows and a resurgence of new issuance. Retail loan funds saw aseventh consecutive, weekly outflow with a $230m withdrawal over the week.
European high yield spreads finished unchanged last week (377bps) after a mid-week bout ofvolatility that resulted in a spread widening up to 390bps before falling back to the level fromthe start of the week. Yields fell, marginally (-3bps to 6.56%). This resulted in a steady
performance of +17bps for the week with CCCs outperforming higher-rated credits. The
expected primary market pick-up has started with six new offerings last week amounting to€3.6bn. All were broad BB rated and well received by the market. Flows into the asset classcontinues though have slowed down compared to previous weeks. This is largely due to ETF
sales as managed accounts still are seeing strong inflows which have been only partially offset
by the ETF sales.
In credit rating news, Evoke (formerly 888) was downgraded to B- from B by S&P. The rating
agency said that a weak H1 had resulted in the corporation taking longer than expected toachieve credit metrics commensurate with a B rating. In other news, Fitch downgraded
Canary Wharf Group Investment Holdings plc's (CWHARF) Long-Term Issuer Default Rating(IDR) to B from BB and reduced its senior secured rating to BB- from BB+. All ratings remain onRating Watch Negative (RWN), which Fitch says reflects "the continuing short-term refinancerisk of CWGIH's £350m bonds due April 2025 and prospective cash flow constraints."

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In Credit  16 September 2024

In sector news, autos are looking quite weak. Profit warnings from OEMs (VW, BMW, Volvocars) are contributing to a negative sentiment. The auto sector took a hit in the last couple ofweeks on headline negative news (VW closing down a German factory and BMW announcingthat earnings will be lower on the back of a slowdown in shipments due to brake issues, etc).
And finally, a resolution for Playtech as it agrees to new terms with Caliplay, resolving a legal
dispute. The resolution means Playtech will now receive 80% of fees due to the company aswell as an agreed process going forward (including a board rep), which will be positive for thegrowth and liquidity of Playtech.
In M&A news, there were a number of stories in the gaming sector. IGT announced plans tosell its gaming business while retaining the lottery business. Flutterer (BBB-/Ba1) stated it isbuying a Brazilian business (NSX Group). The plan is for 56% for $350m in cash while also
injecting funds into its existing Brazilian business. In the leisure sector, PureGym made a bidfor US-based Blink Fitness (itself a chapter 11 story). If successful it would acquire 67 gyms ofBlink Fitness around NYC and New Jersey for $105m. PureGym has in the past spoken about
potentially expanding into the US, running a couple of trial gyms there to get to know themarket.

Asian creditThe August activity data in China reflects the challenges in the domestic demand environment.
Retail sales remained below 3% for the third month and FAI spending was weaker than
expected with a YTD low of 3.4% y/y. Industrial production in August decelerated to 4.5% y/y(July 2024: +5.1% y/y). Additionally, deflationary risks have increased with the decline in core
CPI and PPI. The real estate sector remained depressed. New home sales by area declined
12.6% y/y in August (July: -12.3% y/y) and new home sales by value shrank 16.3% y/y (July: 15.7% y/y).
In Thailand, PTT Global Chemical is taking steps to address its loss-making entities. Thecompany has announced the judicial reorganization of Vencorex France and Vencorex TDI,
which will be completed within three-four months. Vencorex produces intermediate
petrochemicals that are used for coating applications. In Malaysia, Petroliam Nasional Bhd(Petronas) is maintaining discussion with the Sarawak State Government about the rights tonatural gas trading and distribution in Sarawak. The Sarawak State Government has beenpushing Petronas to finalize an agreement that will cede control of the oil and gas trading
activities to the state by 1 October.

CTEA7019644.1 Issued September 2024 | Valid to end November 2024

In Credit  16 September 2024

CTEA7019644.1 Issued September 2024 | Valid to end November 2024

In Credit  16 September 2024

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CTEA7019644.1 Issued September 2024 | Valid to end November 2024