Morgan_Stanley_Fixed-US_Credit_Strategy_2024_Performance_Recap-112595710_52页_3mb

US Credit Strategy Summary

Core Content

The 2024 performance of US corporate credit was marked by strong excess returns, though total returns declined toward the end of the year due to rising interest rates. Loans continued to outperform both high yield (HY) and investment grade (IG) credits, delivering a total return of 9.0%, compared to 8.2% for HY and 2.1% for IG. IG spreads tightened by 19bp to 80bp, while lower-quality credits, particularly BBBs, outperformed with 3.1% excess returns. The middle part of the IG curve, especially the 7-10Y+ segment, showed significant tightening, with a 25bp reduction. Financials also compressed sharply relative to non-financials, with a 17bp narrowing in the basis.

Key Performance Highlights

• Total Returns:

  • Loans: 9.0%
  • High Yield (HY): 8.2%
  • Investment Grade (IG): 2.1%

• Excess Returns:

  • BBBs: 3.1%
  • Single-As: 2.0%
  • HY CCCs: 18.2%
  • HY BBs: 6.3%
  • HY Single-Bs: 7.4%

• Fund Flows:

  • IG: +105bn (up from +25bn in 2023)
  • Loans: +21bn (reversing previous outflows)
  • HY: +16bn (similar trend to loans)

• Supply and Issuance:

  • IG Gross Supply: Increased 26% to $1.6tr
  • IG Net Issuance: Increased 33%
  • HY Supply: Increased 60% to $280bn
  • Institutional Loan Issuance: Rebounded with $501bn, up 113% y/y

Sector Performance in Investment Grade

• Top Performing Sectors:

  • Tobacco: +4.6% excess return
  • Life Insurance: +4.2% excess return
  • Healthcare REITS: +4.1% excess return

• Underperforming Sectors:

  • Restaurant Products: +1.0% excess return
  • Construction Machinery: +0.6% excess return
  • Health Insurance: +0.5% excess return

European Credit Overview

• IG Spreads: Tightened significantly, with iTraxx Main and EUR IG showing notable reductions.
• HY Spreads: EUR HY BB and EUR HY B outperformed, while EUR HY CCC showed a large spread increase.
• Overall IG Spread Tightening: EUR IG spreads decreased by 36bp, and EUR HY spreads decreased by 72bp.

Investment Grade Market Metrics

• IG Index Growth: Increased by over $445bn (+5%) in 2024
• Liquidity: Trading volumes and turnover sharply increased
• ETF Inflows: Reached new historical highs, with IG ETFs seeing significant growth
• Credit Quality: Median credit quality improved, with AAA and AA sectors showing positive returns

Investment Grade Curve Performance

• Spreads:

  • IG Index: 80bp (down from 99bp)
  • 1-3Y: 52bp (down from 67bp)
  • 3-5Y: 70bp (down from 89bp)
  • 5-7Y: 78bp (down from 96bp)
  • 7-10Y: 92bp (down from 117bp)
  • 10-25Y: 97bp (down from 118bp)
  • 25Y+: 100bp (down from 113bp)

• Prices:

  • IG Index: 92 (down from 94)
  • 1-3Y: 98 (down from 97)
  • 3-5Y: 98 (down from 97)
  • 5-7Y: 91 (down from 93)
  • 7-10Y: 97 (down from 94)
  • 10-25Y: 88 (down from 94)
  • 25Y+: 79 (down from 83)

Credit Quality and Issuance

• Credit Quality:

  • AAA: Median credit quality of 5.8
  • AA: 111.7
  • A: 596.1
  • BBB: 487.3
  • Split: 37.2
  • NR / Other: 43.3

• Coupon Types:

  • Fixed: 1,225.2bn
  • Float: 42.6bn
  • SOFR: 42.4bn

• Maturity Buckets:

  • 3yr & In: 251.3bn
  • 5yr: 348.1bn
  • 7yr: 78.4bn
  • 10yr: 396.6bn
  • 20yr: 29.4bn
  • 30yr: 123.8bn
  • >32yr: 26.7bn
  • Perpetual: 28.6bn

ESG Labeled Bonds

• All ESG Labeled: 33.8bn
• Green: 27.5bn
• Sustainability: 4.8bn
• Social: 1.5bn

Investment Grade Fund Flows

• Mutual Funds: Modest inflows
• Corporate Bond Only Funds: Healthy inflows
• ETFs: Cumulative inflows reached new highs

Foreign Holdings

• Insurance: Increased 1% from YE 2023
• Foreign Bond Ownership: Increased 1% from YE 2023

Summary of Key Insights

• Credit Outperformance: Loans outperformed HY and IG throughout 2024, driven by strong total returns and tighter spreads.
• Interest Rates: Rising rates led to mixed total returns in IG, with notable tightening in the middle of the curve.
• Sector Variability: Certain sectors like Tobacco, Life Insurance, and Healthcare REITS showed strong excess returns, while others such as Restaurant Products and Construction Machinery underperformed.
• Fund Flows: IG and HY saw positive inflows, reversing previous outflows, with Loans and HY leading the way.
• Supply Growth: IG and HY supply increased significantly, with institutional loan issuance showing the most notable rebound.
• Liquidity: Trading volumes and ETF inflows increased, indicating improved market activity and investor confidence.
• ESG Trends: ESG labeled bonds, especially Green and Social, showed positive growth and returns.