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Barclays US Credit Alpha: Calm after the Storm Key Points Summary

1. US Credit Markets Overview

• Markets stabilized after "Liberation Day" volatility, with broad asset classes rallying. High-yield and investment-grade (IG) spreads widened in early 2025 amid policy uncertainty, but have since narrowed.
• Key Observation: Forward curves remain downward sloping, making secured bonds more attractive relative to leveraged loans. Bonds outperformed loans in yield value due to yield compression.

2. IG Corporate Market

• Price Action: After a late April rally, IG and high-yield indices closed near "Liberation Day" lows, showing resilience despite supply pressures and Taiwan dollar fluctuations.
• Sector Differentiation: Non-cyclicals (e.g., industrials, energy) underperformed cyclicals. Energy sector lagged due to fundamentals, as WTI oil prices fell ~16% year-to-date.
• Hedging Dynamics: Taiwanese life insurers maintain significant FX exposure but show limited immediate change in investment strategy due to forced unwind risks.

3. High Yield and Leveraged Loans

• Bond-Loan RV: Forward curve-adjusted bond yields now competitive with loan yields. Barclays favors swaps out of loans into secured bonds, especially those offering yield-positive returns ($1.69 in May 2025 example).
• Screen Details: 23 swaps analyzed, all yield-positive on a forward-adjusted basis. Key were same-issuer, similar maturity swaps with high "Trade Efficiency Scores" (TES ≤ 5).

4. CDS: On the Move

• USA CDS spreads widened in 2025 due to unresolved debt ceiling and elevated policy uncertainty. Spreads reached late-episode highs, implying lower probability of default (just above 1%) due to lower cheapest-to-deliver (CTD) bond prices.
• Event Timing: Expected x-date falls late-August 2025 or early September 2025, contingent on Congressional action.
• Term Structure: Increasing implied probability of credit events from June onward, peaking at December 2025.

5. Risk & Outlook

• Macroeconomic Factors: Persistently elevated policy uncertainty risks valuation stability; slow growth and weak sentiment are headwinds. FOMC data point to minimal rate cuts in 2025.
• Cross-Currency Flows: "Sell America" flows unlikely short-term, with Asia expected to drive rotations over multiple years. ESG/proprietary structures may boost private credit growth.

Key Conclusions

• Secured Bonds Preferred: Forward curve-adjusted yields favor bonds vs. loans across credit quality levels.
• IG Resilience: Market fragmentation creates key spread divergences; energy remains a systemic laggard.
• CDS Impact: Debt ceiling uncertainty shapes CDS markets, with potential near-term triggers pending Congressional action.

Note: This summary adheres strictly to reporting and analysis tone without client-advisory implications. Forward-looking statements are subject to market risk.