Bond Sales Trends and Market Forecasts

Considerations for the High Yield Bond Market: The BB-rated High Yield (HY) bond market has shown strong performance, with favorable news recently related to growth and inflation.  Fundamentally, the companies represented in the HY Index have a favorable upgrade-to-downgrade ratio. BB-rated bonds constitute 50% of the HY market, distinguishing them from lower-rated B and CCC companies. BB HY bonds typically feature fixed rate, comparatively lower coupons, resulting in lower liability costs and more manageable debt service. In Contrast, the CCC-rated segment shows a concerning trend, with an upgrade-to-downgrade ratio below 0.5 (2x as many downgrades). The credit quality dispersion, shown in the chart below, reveals that BB vs. CCC-rated bonds trade at a spread margin of ~400 to ~1,200 bps, currently sitting inside of 750 bps.  While CCC credits can generate substantial returns during robust economic growth in a low default rate environment, and have rallied with the market in recent days, CCC deterioration is most pronounced during distress and recession. During the first half of 2020, the BB-CCC spread differential reached 1,200 bps, and in 2016, CCC spreads were even wider. It is noteworthy that Europe is straddling recession, and the BB-CCC European HY bond spreads have recently widened to 1,400 bps, surpassing its peak in 2020. So despite, the recent rally in lower-rated HY bonds, caution is warranted for the weakest segment of corporate credit. The HY bonds historical default rate: BB’s 0.4% default rate, B’s 1.4% default, and CCC’s a stunning 14.3% historical default rate! During a recession, default rates tend to increase significantly from historical measures. Composition of HY Index: 50% BB, 39% B, 11% CCC. 1 year ago, the HY Bond Index had 1.2% default rate. Today, the trailing 12M default for the HY bond market is 2.6%. By Q2 2024, I expect the default rate for high yield bonds exceed 4%. Michael Schlembach, Marathon Asset Management’s PM for High Yield, expects default rates to increase in 2024, with peak default rates potentially reaching ~1.0%, ~3.0%, and >20%+ for BB, B, and CCC’s, respectively. The key will be to invest in the debt of companies with solid fundamentals and financial strength to navigate the pending downturn. If you believe as I do that an economic slowdown (potential recession) is likely in 2024, it might be best to focus on higher quality credits with robust operating businesses within the HY market. Ford serves as a prime example in the BB sector, having recently been upgraded to Investment Grade by S&P, marking it as the largest 'rising star'. Ford represents 2% of the HY index with $41 billion of bonds, its upgrade has spurred demand for other quality BB-rated bonds to replace it. While recent inflows have tightened BB spreads, I advise against trading based solely on the technicals, as this post is intended purely for informational purposes. U.S. HY rated BB vs. CCC Differential:

Convertible Bonds: From Niche Market to the Center of Attention? 📈 #ConvertibleBonds have shown impressive performance in recent years, and 2025 has pushed this #asset class firmly into the spotlight: Our paper analyzes the fundamental & machine-learning drivers behind this development and outlines the expected returns. Convertibles combine the downside protection of a bond with the upside potential of equities. Growth companies and firms in restructurings benefit from lower financing burdens, helping explain why the U.S. accounts for around 75% of issuance and outstanding volume. Credit quality has also improved, spanning investment grade, high yield and non-rated issuers. Performance is driven by the macroeconomic regime and equity and bond fundamentals, especially in technology and small caps. Higher volatility typically supports prices, while rising rates or wider spreads can weigh on them. Their asymmetric return profile—greater upside than downside—makes convertibles comparatively resilient and well suited for capturing dispersion in small caps. Looking ahead, AI-driven capex and decarbonization projects are likely to anchor the next issuance wave ⚡. Current conditions of moderate growth and episodic volatility are supportive, and our AI-enhanced forecasts point to a 12-month forward return of 11.4%, helped by low business sentiment, economic uncertainty and attractive small-cap valuations.

📉 BofA's Revised 2025 Leveraged Finance Outlook: A Deep Dive into the Slowdown The leveraged finance market is facing stronger headwinds than anticipated, prompting Bank of America (BofA) to significantly downgrade its 2025 forecasts as per a recent PitchBook report. Here's what you need to know: Key Forecast Revisions 🔹 High-Yield Bonds: Projected to remain flat at $285Billion in 2025 (vs. $282B in 2024) 🔹 Leveraged Loans: Expected to decline 10% to $450Billion 2025 (from $502B in 2024) Underlying Causes of the Slowdown 1️⃣ M&A Activity Failing to Launch - Early 2025 optimism about Fed rate cuts and a pro-business Trump administration fueled expectations of an M&A boom - Reality check: Q1 2025 activity declined 22% YoY in high-yield bonds - Three major roadblocks: - Persistently high cost of capital (even with expected Fed cuts) - Rich valuation multiples making Leveraged Buyout (LBO) attractiveness challenging - U.S. trade tariff policy uncertainty creating hesitation among strategics and sponsors 2️⃣ Refinancing Dynamics Diverging - High-yield bonds: Active refinancing pipeline due to $150B+ maturities in 2025-26 - Leveraged loans: Fewer imminent maturities = lower refinancing urgency - Private credit competition: Increasingly taking refinancing share from syndicated loans 3️⃣ Structural Market Shifts - Sponsor activity muted: PE firms sitting on $1Trillion+ dry powder but constrained by: - High debt costs (avg. LBO debt multiples down to 4.5x from 5.5x peak) - Limited exit opportunities (IPO window remains shaky) H2 2025 could see improvement if: - Fed cuts materialize as expected (current forecast: 2-3 cuts in 2025) - Reduced policy uncertainty around global trade and tariffs - Valuation expectations reset between buyers/sellers Krishank Parekh | LinkedIn

𝗚𝗹𝗼𝗯𝗮𝗹 𝗕𝗼𝗻𝗱 𝗥𝗮𝗹𝗹𝘆: Growth Concerns Take Center Stage ➡️ The global bond market is experiencing a significant shift as investors pivot from inflation fears to concerns over a potential economic slowdown. Driven by the ongoing conflict in the Middle East and surging energy costs, sovereign bonds are rallying as demand for "𝘀𝗮𝗳𝗲-𝗵𝗮𝘃𝗲𝗻" debt returns (1st chart from Bloomberg). ✨ 𝗞𝗲𝘆 𝗧𝗮𝗸𝗲𝗮𝘄𝗮𝘆𝘀:  • 𝗬𝗶𝗲𝗹𝗱𝘀 𝗮𝗿𝗲 𝗙𝗮𝗹𝗹𝗶𝗻𝗴: US Treasury yields have retreated, with the 2-year note falling to 3.85% and the 10-year benchmark dropping to 4.36%. Similar declines were seen in UK, German, and Japanese debt.  • 𝗥𝗲𝗰𝗲𝘀𝘀𝗶𝗼𝗻 𝗥𝗶𝘀𝗸𝘀 𝗥𝗶𝘀𝗶𝗻𝗴: Goldman Sachs now places the probability of a downturn over the next year at 30%.  Major funds like Pimco suggest markets may still be underestimating the risk of a sharp slowdown triggered by the war.  • 𝗠𝗼𝗻𝗲𝘁𝗮𝗿𝘆 𝗣𝗼𝗹𝗶𝗰𝘆 𝗦𝗵𝗶𝗳𝘁: Traders have largely unwound expectations for further US rate hikes this year. Market swaps are even beginning to price in potential rate cuts toward the end of next year (2nd chart from Bloomberg).  • 𝗘𝗻𝗲𝗿𝗴𝘆 𝗖𝗿𝗶𝘀𝗶𝘀 𝗖𝗼𝗻𝗰𝗲𝗿𝗻𝘀: With Brent crude trading around $115 a barrel, there are growing fears that a protracted global fuel shortage could lead to economic shutdowns similar to those seen during the pandemic. #GlobalEconomy #GlobalBonds #MonetaryPolicy

I had the pleasure of joining Bloomberg Radio for a great discussion with Tom Keene and Paul Sweeney on the 2025 outlook for bond markets, high yield credit, and opportunities for systematic strategies. A few key takeaways from our conversation:   - The Fed easing cycle has so far pushed back on the expectation that bonds outperform when interest rates are cut. The direction of front-end rates hasn’t necessarily translated to the long-end, where yields could continue to be pushed higher by concerns over sticky inflation and the impact of debt and deficits. This raises the importance of where you hold your duration as the majority of returns to broad bond market exposures like the US Agg index are primarily driven by longer maturities. - The opportunity in high yield remains compelling given attractive income and a supportive economic outlook. Yet with credit spreads at or close to historic tights, managing downside risks is crucial for maximizing return potential and limiting price erosion from any spread widening in 2025. - Investor outlook discussions largely focus on directional market opportunities, driven by dynamics like interest rates or corporate results. While this is one way to target “alpha” or excess returns, it misses a key source of opportunity that we pursue in our systematic portfolios. Looking beneath the hood of market direction, we continue to see a rich opportunity set in the cross-section of markets for seeking differentiated and diversifying returns.   Stay tuned for our upcoming Systematic Fixed Income Outlook that will be released in the new year, covering these topics and more.   #Bonds #HighYield #SystematicInvesting