Corporate Credit Highlights

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

Monthly Return
5/31/2021
OAS*
5/31/21
12/31/20
12/31/19
U.S. Credit
0.72%
79
92
90
Single A Bonds
0.66
%
65
74
70
BBB Bonds
0.84
%
107
124
125
1-3 Year Credit
0.18
%
27
30
36
7-10 Year Credit
0.83
%
88
96
98
Long Credit
1.05
%
122
141
139
Monthly Return
5/31/2021
OAS*
5/31/21
12/31/20
12/31/19
Bank Loans
0.52%
443
486
461
B Loans
0.58
%
444
469
470
BB Loans
0.35
%
304
305
262
Loans priced over $90
0.52
%
419
422
368
Loans priced up to and Including $90
0.49
%
1268
1258
1270
Issues over $1 billion
0.53
%
390
414
379
Issues $201 million to $300 million
0.78
%
658
755
685
Monthly Return
5/31/2021
OAS*
5/31/21
12/31/20
12/31/19
High Yield
0.30%
296
360
336
BB Bonds
0.25
%
226
264
182
CCC Bonds
0.70
%
493
658
869
Intermediate High-Yield Bonds
0.30
%
298
363
333
Long High-Yield Bonds
0.22
%
275
329
397
Very Liquid High-Yield Bonds
0.37
%
323
340
319

Source: Bloomberg Barclays and Morningstar as of 5/31/21. U.S. Credit represented by the Bloomberg Barclays U.S. Credit Index and index components. Bank Loans are represented by the Credit Suisse Leverage Loan Index ad index components. High Yield represented by the Bloomberg Barclays U.S. Corporate High Yield Index and index components.

*3-year discount margin shown for Back Loans. Option adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return.

Investment Grade

  • Per Seaport Global on contributing factors to strong investment grade technical “mutual funds that built-up cash for redemptions in April that did not materialize, steady inflows from overseas investors including a recent pickup in overnight buying from Asia, pension inflows into credit, asset allocators rotating out of equities into credit, and tight spreads for investment grade securitized product, creating increased demand from front-end investment grade.” 1
  • Per Bank of America on investment-grade corporates use of cash built during 2020, “U.S. investment-grade industrial companies are bringing down the cash raised in 2020 to fight against the coronavirus, but are they doing that in debt or equity friendly ways? To get a sense, we filtered data for companies that issued to build war chests March through September 2020, and then reduced cash meaningfully in 4Q20 and 1Q21 (based on available data so far).Data revealed 25 companies that reduced gross debt, 10 companies that increased shareholder-friendly activity (dividends, buybacks, mergers and acquisitions) relative to the same period a year ago, and 7 companies that did both. Evidence overwhelmingly suggests excess cash is being used in debt-friendly ways.” 2

Bank Loans

  • J.P. Morgan on leveraged loan issuers, “the number of loan issuers has risen by 66 year-to-date (YTD) to a record high 1,420 after contracting for the first time in a decade in 2020 (-2). Note since 2010, the number of bond issuers has grown by a lot less (5%) than the number of loan issuers (134%).There are currently only 645 issuers of bonds (31% of the total market, +7 YTD), only 1,056 issuers of loans (51%, +47 YTD), and another 364 cross issuers (18%, +19 YTD) for a combined 2,065 leveraged credit issuers (+73 YTD).” 3   
  • J.P. Morgan comparing loans versus high-yield, “note loans are outperforming high-yield bonds by 29 basis points in May after under performing by 99 basis points in March and April. And the loan yield-to-3-year takeout is now 13 basis points above yields for the J.P. Morgan U.S. High Yield Index after trading as much as 31 basis points above on May 11 and a 14-month high 39 basis points above on 12/31.” 4
  • J.P. Morgan on loan default rate, “the loan par-weighted default rate ended May at a 20-month-low of 1.52%, down 73 basis points month-over-month and down 243 basis points YTD. Including distressed exchanges, the loan default rate ended the month at 1.96% (ex-Energy 1.68%).” 5
  • Collateralized loan obligation issuance YTD stands at $59 billion as of May 20, 2021 according to Leveraged Commentary & Data, which is the highest amount for that period dating back to 2005. 6

High Yield Corporates

  • Morgan Stanley, earlier this week, lowered its 12-month default forecast for high yield to 2.5%-3% from 5%-6%.7
  • Deutsche Bank on rising stars versus fallen angels, “so far in 2021, the volume of rising stars has outpaced that of fallen angels, reversing last year's trend. In the high-yield market we have had over $14 billion of rising stars versus just $2 billion of fallen angels, with the net $12 billion of rising stars already the seventh highest since 1997.” 8
  • Citi on high yield, “not only is high yield is on pace for $500 billion of issuance this year, we are also seeing a marked increase in debut issuers, a sign typically associated with a frothy primary market. Over the last three months, a record number of issuers were introduced to the market. Nevertheless, were main constructive on high yield. However, we are cognizant conditions will eventually force the Federal Reserve to tap the brakes. As a result, in the latest Global Asset Allocation, we introduced a 375 basis point (352 basis point currently for Citi U.S. High Yield) spread target for mid-2022 on expectations of reduced monetary support." 9
1
Source: Seaport GlobalSecurities.
2
Mikkelsen, Hans et al.Credit Market Strategist. BofA Global Research, May 2021.
3
Jantzen, Nelson etal. JPM High-Yield Leveraged Loan Morning Intelligence. J.P. Morgan,May 27, 2021.
4
Jantzen, Nelson et al. JPMHigh-Yield Leveraged Loan Morning Intelligence. J.P. Morgan, May 28, 2021
5
Beinstein, Eric et al. JPM Daily CreditStrategy & CDS/CDX am update.  J.P.Morgan, June 2, 2021.
6
Global CLO Roundup. S&P GlobalMarket Intelligence, May 25, 2021.
7
Sankaran, Srikanth et al. US Credit Strategy Mid-Year Outlook. Morgan Stanley, May 24, 2021.
8
Nicol, Craig. Global Leveraged Finance Weekly Wrap. Deutsche Bank, May 21, 2021
9
Anderson, Michael H. Dobrinov, Philip. US High Yield Strategy Flash. Citi, May 27, 2021.

Definitions

One basis point is equal to 0.01%.
The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.
The Bloomberg Barclays US Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets.
The Credit Suisse Leveraged Loan Index is an index of U.S. dollar-denominated leveraged loan market securities.
Fallen angels refers to investment grade bonds that are given a reduced rating to “junk bond” due to a decline in the credit rating of the issuer.
The J.P. Morgan U.S. High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market.
Par-weighted loan default rate is the rate of borrowers who fail to remain current on their loans based on the
par amount. 
Rising stars refers to a bond that is rated as a “junk bond ”but could become investment grade because of improvements in the issuing company's credit quality.

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. Debt securities with longer durations or fixed interest rates tend to be more sensitive to changes in interest rates, making them generally more volatile than debt securities with shorter durations or floating or adjustable interest rates. The Fund is subject to liquidity risk (the risk that an investment may be difficult to purchase and sell within a reasonable amount of time at approximately the price the Fund has valued the investment) and credit risk (the risk an issuer may be unable or unwilling to meet its financial obligations, risking default). Floating-rate loans (usually rated below investment grade) and high-yield/high-risk bonds (“junk bonds”) have greater risk of default than higher-rated securities/ higher-quality bonds that may have a lower yield. Interest rates and bond prices have an inverse relationship. The Fund is also subject to foreign-markets risk.

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.

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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.

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