High-Yield Credit Markets: Resilience Amid Economic Uncertainty

Current Performance of High-Yield Credit Markets

High-yield credit markets are showing mixed performance. While spreads on high-yield corporate debt have narrowed (C), liquidity risks and widening credit spreads remain concerns (GS). Credit costs and net charge-offs have increased (JPM), but improving delinquency trends offer some optimism (BAC).

"High yield securities ("junk bonds") are lower rated securities that may have a higher degree of credit and liquidity risk." --- (MS, press release, 2024/06/17)

"For example, a decrease in liquidity in the market could have the impact of (i) increasing our bid/offer spread, (ii) decreasing investor confidence and thereby decreasing client activity levels, and (iii) widening of credit spreads on our inventory positions." --- (GS, sec filing, 2024/Q1)

"Expenses of $9.4 billion were up 13% year-on-year, predominantly driven by First Republic expenses now reflected in the lines-of-business, as I mentioned earlier, as well as field compensation and continued growth in technology and marketing.In terms of credit performance this quarter, credit costs were $2.6 billion reflecting net charge-offs of $2.1 billion up $813 million year-on-year, predominantly driven by Card, as newer vintages season and credit normalization continues." --- (JPM, earning call, 2024/Q2)

"We've seen spreads narrow in the markets on high-yield corporate debt, leveraged debt, et cetera." --- (C, earning call, 2024/Q1)

"We included a credit card delinquency slide, No. 28 in our appendix, and we’re encouraged by the trend of delinquencies because the late stage increases slowed and early stage delinquencies improved as well, and that leads us to believe we should begin to see consumer net charge-offs start to level out over the next quarter or so. All of this is still well within our risk appetite." --- (BAC, earning call, 2024/Q1)

Economic Conditions Impacting High-Yield Credit Markets

Economic conditions such as changing interest rates, market volatility, and global uncertainties are significantly impacting high-yield credit markets. Factors like recessionary fears, inflation, and cyclical commodity markets further contribute to the unpredictability and increased borrowing costs in these markets.

"In addition, economic conditions and actions by policymaking bodies are contributing to changing interest rates and significant capital market volatility, which, along with any increases in our borrowing levels, could increase our future borrowing costs." --- (AMZN, sec filing, 2024/Q1)

"If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost." --- (MSFT, sec filing, 2024/Q3)

"Cash Flow and Capital Expenditure Trends Our capital expenditures are typically difficult to project beyond the short-term given the number and breadth of our core projects at any given time, and may further be impacted by uncertainties in future global market conditions." --- (TSLA, sec filing, 2024/Q2)

"The other factor that obviously has an impact, a significant impact is the state of the commodity markets, and they tend to go in cycles." --- (AAPL, earning call, 2024/Q3)

"Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the Internet, online commerce, cloud services and new and emerging technologies, and the various factors detailed in our filings with the SEC." --- (AMZN, earning call, 2024/Q1)

Investor Sentiment and Behavior in High-Yield Markets

Investor sentiment in high-yield markets is cautious, with a shift towards lower fee offerings and concerns over rising interest rates. However, there is optimism for increased investor appetite for duration risk and global assets as market and interest rate clarity improves.

"Fixed income markets were generally weak during the quarter. While this sentiment drove organic inflows at Invesco, our asset mix profile remained constrained as did revenue growth due to investors shifting their investments into lower fee offerings." --- (IVZ, sec filing, 2024/Q1)

"Laurence D. Fink: Well, I think, as I said in my prepared remarks, sitting in 5% yield makes a lot of sense unless you put in the -- if your liabilities are long dated, you lost money actually because with equity markets up 24% and 17% this year alone." --- (BLK, earning call, 2024/Q2)

"As interest rates rise, bond prices fall. Investments in high-yield bonds involve greater risk." --- (TROW, press release, 2024/08/07)

"While daily average global equity market levels continued to move higher and equity markets again reached new all-time highs in the second quarter, gains continued to be narrowly concentrated in a few names. Meanwhile, fixed income markets struggled in 2Q as geopolitical risks continued, economic data generally remained robust, and investors priced in a more gradual cycle of rate cuts, even as the ECB delivered its first rate cuts since the pandemic." --- (STT, earning call, 2024/Q2)

"All of that said, we have plenty of reasons to be optimistic that with increasing market and interest rate clarity, a broadening of participation will continue to take hold and investor appetite for more duration risk on and global oriented assets will increase.So moving on to Slide 3 of the presentation, we continue to believe that our advantageous market position and clarity of strategic focus provides us with the tools to deliver enhanced operating performance and returns for our shareholders." --- (IVZ, earning call, 2024/Q2)

Default Rates and Credit Quality Trends

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"Our credit ratings can also relate to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issue may default." --- (SPGI, sec filing, 2024/Q2)

"The model can be used by lenders to better manage credit risk and default rates when extending competitive credit offers to consumers." --- (FICO, press release, 2024/04/17)

"From a macroeconomic standpoint, we have a positive outlook for the remainder of the year and expect global GDP to be between 2% and 3% for the full year.Our June default report, which was just published last week, is signaling that global default rates peaked in April and will continue to decline gradually in the coming 12-months." --- (MCO, earning call, 2024/Q2)

"The current US speculative-grade corporate #default rate of 4.9% is higher than the long-term average of 4.1%, but this may be an overstatement of systemic #credit stress when taken at face value. Read the full article from @SPGlobalRatings: https://t.co/TnbrxkMBm3" --- (SPGI, twitter, 2024/06/07)

"The model can enable an increase in mortgage originations of up to 5% (without taking on additional credit risk) or reduce default risk and losses by up to 17%." --- (FICO, press release, 2024/07/01)

Sector-Specific Trends in High-Yield Credit Markets

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"So, in an over supplied market credit values are down both at federal level and at state level. We welcome to our margin business. This is the way value chain" --- (CVX, earning call, 2024/Q2)

"Those market conditions are driven more by supply than demand. Frankly, we're continuing to see growth in demand, not as high as we've seen historically, but continued good growth and frankly in the first quarter saw some of that pick up." --- (XOM, earning call, 2024/Q1)

"You'll see significantly more than the majority of our competitors. And we've invested to actually shift our core businesses into high growth areas, while at the same time complementing that with M and A." --- (JNJ, conference, 2024/05/15)

"We believe as a result of this, together with our financial assets, access to capital markets, revolving credit agreements, and available lines of credit, we have and will maintain the ability to meet our liquidity needs to support ongoing operations, our capital allocation objectives, and our contractual and other obligations for the foreseeable future." --- (PFE, sec filing, 2024/Q1)

"Through strong, long-standing relationships across sectors and a powerful credit distribution network, Seaport gives institutional clients the most informed and comprehensive view of the specialized secondary market. www.seaportglobal.com" --- (CVX, press release, 2024/07/29)

Regulatory Impacts on High-Yield Credit Markets

Regulatory changes, including increased capital requirements and ongoing evaluations like Basel III, are impacting high-yield credit markets by potentially increasing credit losses and dampening deal-making activities. These changes could materially affect financial performance and market conditions, highlighting the significant influence of regulatory environments on high-yield credit markets.

"Unanticipated declines in business performance, increases in credit losses, increases in capital requirements, as well as deterioration in economic or market conditions, adverse regulatory or legislative changes or increases in the estimated market cost of equity, could cause the estimated fair values of the Firm’s reporting units to decline in the future, which could result in a material impairment charge to earnings in a future period related to some portion of the associated goodwill." --- (JPM, sec filing, 2024/Q2)

"So, if you put it all together, I think we expect the rate environment and the financing markets to continue to be accommodative and as well as to a continued deal-making with M&A being a bit larger in the overall mix, although some of the regulatory elements have put a damper on part of that." --- (C, earning call, 2024/Q2)

"These outcomes could materially affect the company's financial performance through increased credit, litigation, regulatory and reputational risks.Reputational damage from greenwashing allegations could be financially significant, especially if it harmed the company's relations with its current and future clients, employees and investors." --- (GS, event transcript, 2024/04/24)

"Total capital under the Standardized approach increased $1.0 billion primarily due to the same factors driving the increase in Tier 1 capital and an increase in the adjusted allowance for credit losses included in Tier 2 capital, partially" --- (BAC, sec filing, 2024/Q1)

"as regulators continue to evaluate Basel III endgame. Additional regulatory clarity and a sustained capital markets recovery should have a multiplier effect across our global franchise, further unlocking the unique power of our integrated firm." --- (MS, earning call, 2024/Q1)

Future Outlook and Predictions for High-Yield Credit Markets

Economic uncertainty, inflationary pressures, and geopolitical tensions are expected to negatively impact high-yield credit markets, leading to potential declines in asset prices, market-making activity, and credit quality metrics. Anticipated rate cuts may influence net interest income, while credit loss allowances will consider a range of future economic conditions.

"If uncertainty and concerns about geopolitical tensions and the economic outlook remain elevated or grow, including those about central bank policy, inflation and the commercial real estate sector, it may lead to a decline in asset prices, a decline in market-making activity levels, or a decline in investment banking activity levels, and net revenues and provision for credit losses would likely be negatively impacted." --- (GS, sec filing, 2024/Q2)

"Uncertainty remains regarding broader economic impacts as a result of inflationary pressures, elevated rates and the current geopolitical environment and 23 Bank of America could lead to adverse impacts to credit quality metrics in future periods. Consumer Portfolio Credit Risk Management" --- (BAC, sec filing, 2024/Q1)

"To finish up, we have the outlook on Page 9. We now expect NII ex-Markets to be approximately $89 billion based on a forward curve that contained three rate cuts at quarter-end." --- (JPM, earning call, 2024/Q1)

"The allowance for credit losses takes into account the weighted average of a range of forecasts of future economic conditions over the expected life of the loans and lending commitments." --- (GS, sec filing, 2024/Q1)

"Uncertainty remains regarding Bank of America 28 broader economic impacts as a result of inflationary pressures, elevated rates and the current geopolitical environment and could lead to adverse impacts to credit quality metrics in future periods. Consumer Portfolio Credit Risk Management" --- (BAC, sec filing, 2024/Q2)