Extra Credit^*

• The Fed increased rates by an aggressive 425 bps during 2022. While we believe interest rate-sensitive sectors such as housing have already priced in some of this risk, higher rates may have a more lagged effect on certain sectors and issuers, which should be realized in 2023.

• Upgrades outpaced downgrades in U.S. investment grade bonds during 2022, and could reverse trend in 2023, as, we believe, fundamentals have likely peaked. However, in our opinion, select issuers have been able to manage their balance sheets effectively despite the macro volatility and are well positioned for ratings upgrades over the course of 2023.

• Six new U.S. CLOs priced last week totaling $2.5 billion compared with the five-week average of $1.3 billion.

• In 2022, 328 U.S. CLOs priced totaling $152.5 billion compared to 920 U.S. CLOs totaling $421.1 billion for FY21.

• Fourth quarter high-yield funds’ allocation to loans declined 22 bps q/q to a 10-year low of 2.95% and was down 126 bps in 2022 amid record historical outperformance of loans vs bonds. For reference, high yield funds’ exposure to loans peaked at 5.1% in 2Q14 and was as low as 1.9% in 4Q11. The large reductions to loans by high yield managers was understandable given the significant underperformance of bonds. For context, high yield funds’ loan exposure has averaged 3.60% since the start of 2010.

• Following $2.8 billion of high-yield bonds that cleared at the week’s start, mid-week was almost print-free for high yield. With five trading sessions remaining in January, month-to-date volume totaled $14.5 billion. That figure is down from the $24 billion in January 2022 and far from the record-setting January total of $52 billion in 2021.

• In secondary markets, high-yield trading volumes were on the light side in all but the newsiest names and newest issues, as companies reported weaker earnings and layoff announcements from U.S. companies which added to ongoing recession fears.

• The trailing 12-month default rate for high yield bonds and bank loans finished 2022 at 1.6% and 1.6%, well below their long-term average of 3.2% and 3.1%.