OCTOBER 2022

Corporate Credit Highlights

Highlights from investment-grade, bank loan, and high-yield asset classes.

Monthly Return (%)
10/31/22
Year-to-Date Return (%)
10/31/22
Option-Adjusted Spread (BPS)
10/31/22
12/31/21
12/31/20
12/31/19
Investment-Grade Corporate Bonds
-1.03
-18.92
147
87
92
90
Single A Bonds
-1.21
-18.85
137
74
74
70
BBB Bonds
-0.75
-19.80
190
115
124
125
1-3 Year Credit
-0.18
-4.79
83
35
30
36
7-10 Year Credit
-0.69
-19.23
180
93
96
98
Long Credit
-2.30
-30.69
184
130
141
139
Monthly Return (%)
10/31/22
Year-to-Date Return (%)
10/31/22
Option-Adjusted Spread (BPS)
10/31/22
12/31/21
12/31/20
12/31/19
Bank Loans*
0.85
-2.49
655
439
486
461
BB Loans
1.76
0.85
378
307
305
262
B Loans
0.72
-2.96
705
444
469
470
Loans priced over $90
-1.31
-1.15
515
417
422
368
Loans priced up to and including $90
-1.12
-19.83
1278
1380
1258
1270
Issues over $1 billion
1.23
-2.76
607
395
414
379
Issues $201 million to $300 million
-0.58
-2.46
883
639
755
685
Monthly Return (%)
10/31/22
Year-to-Date Return (%)
10/31/22
Option-Adjusted Spread (BPS)
10/31/22
12/31/21
12/31/20
12/31/19
High Yield
2.60
-12.53
464
283
360
336
BB Bonds
2.35
-12.46
291
194
264
182
CCC Bonds
1.28
-15.64
1082
549
658
869
Intermediate High-Yield Bonds
2.68
-11.80
466
285
363
333
Long High-Yield Bonds
0.30
-25.30
404
252
329
397
Very Liquid High-Yield Bonds
3.05
-13.19
524
309
340
319

Source: Bloomberg, Credit Suisse and Morningstar® as of 10/31/22.
U.S. credit represented by the Bloomberg US Credit index and index components. Bank loans are represented by the Credit Suisse Leveraged Loan index and index components. High yield is represented by the Bloomberg US Corporate High Yield and index components.
*3-year discount margin show for bank loans.

comments

Investment Grade

  • Citi on MBS sales from Fed balance sheet: “Our Agency MBS team no longer expects MBS sales in 2023 due to liquidity concerns. This slows the overall pace of balance sheet reduction, as the MBS runoff cap will not bind in the current interest rate environment. MBS principal paydowns are projected to decline from $23bln in October to around $15bln by December and onwards.”1
  • Morgan Stanley strategy on IG spread expectations: “At 160bp, we see a window for compression back towards our year-end target (150bp), as the economy remains resilient for now. Liquidity considerations into year-end are valid but can cut both ways. The challenge is that the dislocation in index spreads relative to September is driven by 1) the Banks sector amid heavy supply,2) illiquid securities, and 3) the front end. The latter two segments can lag even more in a true downturn and could be value traps. Therefore, we recommend keeping it simple and staying in liquid securities, high quality, and low $ bonds… Our base/bear range of 150-175bp in IG has held this year, and as things stand now, we expect these ranges to continue to hold into year-end.”2

Bank Loans

  • Per LCD, a large number of leveraged loan issuers were able to take advantage of the borrower-friendly environment back in 2021 until the first month of this year to refinance term loans and extend maturities. Of the record $614.6 billion of institutional loan issuance in 2021, $178.5 billion (or roughly 29%) of the volume was used to refinance existing debt. As a result, just $110.1 billion of the $1.42 trillion in outstanding loans, or nearly 8% of the market, matures in 2024 or earlier. Another roughly 15% of the index matures in 2025.3
  • Barclays on loan earnings: “Despite the macro-overhang, it feels like we are seeing some signs of normalization in the loans market. Corporate earnings, which have been widely thought of as a potential catalyst for another leg lower in the loans, have largely come in line, or even better than feared in some cases. The same issues of margin pressures are in focus, but it does feel like the market is getting more comfortable with the current outlook as companies start to look ahead to 2023.”4
  • J.P. Morgan strategy on default activity or lack thereof: “There were no new defaults or distressed transactions during October, marking the first time since 2018 there was no default/distressed activity. For context, default/distressed volume totaled $23.4bn in 3Q versus $10.4bn in 2Q and $8.6bn in 1Q. Including distressed exchanges, the US high-yield bond and loan default rates increased 1bp and decreased 8bp m/m to 1.59% and 1.58%, respectively. The HY bond and loan default rates compare to the long-term average of 3.2% (HY) and 3.1% (LL).”5

High-Yield Corporates

  • J.P. Morgan strategy on implied default rate for HY: "The implied default rate for HY spreads (496bp) is 2.8%, or above our 2.25% 2023 default forecast and only slightly below our mild recessionary scenario. Using a historical average excess spread of 330bp and recovery rate of 40%, our 2023 default forecast of 2.25% would imply a HY spread of 465bp by YE22."6
  • J.P. Morgan on fallen angels/rising stars in 2023: "We forecast $160bn of debt to be upgraded from HY to HG through 2023 (Rising Stars) while expecting a modest $15bn of debt to fall from HG to HY (fallen angels) over the same time period."7

1 Citi economist Andrew Hollenhorst, Oct. 27, 2022

2 ”Navigating the Flows,” Morgan Stanley IG strategy by Vishwas Patkar, Oct. 25, 2022

3 LCD, Nov. 2, 2022

4 Rogoff, Bradley, et al. Outlook Call. Barclays. November 2022.

5 Jantzen, Nelson, JPM Daily Credit Strategy & CDS/COX am update. Nov. 2, 2022.

6 Jantzen, Nelson, J.P. Morgan Default Monitor, Nov. 1, 2022..

7 Beinstein, Eric, JPM Daily Credit Strategy & CDS/COX am update, J.P. Morgan, Nov. 2, 2022

Disclosures

Past performance does not guarantee future results. Index performance is not indicative of fund performance. Standardized performance for the fund can be obtained by visiting www.PacificFunds.com.

All investing involves risks including the possible loss of the principal amount invested.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Investors should consider a fund’s investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the Fund and are available from PacificFunds.com. The prospectus and/or summary prospectus should be read carefully before investing.

Pacific Funds are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA), and are available through licensed third parties. Pacific Funds refers to Pacific Funds Series Trust.

Mailing address: P.O. Box 9768, Providence, RI 02940-9768 (800) 722-2333 • www.PacificFunds.com

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