1

Keeping Up With 2021–

Credit Market UpdateFebruary 25, 2021

Michael BuchananDeputy Chief Investment Officer

Robert AbadProduct Specialist

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Jan

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Tho

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Daily Tests

23 Feb 21: 1.18M

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Apr

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Jul 2

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Aug

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Tho

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Daily Cases

23 Feb 21: 67,879

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60

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120

140

Apr

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Aug

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Tho

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Currently Hospitalized

23 Feb 21: 55,058

0

500

1,000

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2,000

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3,000

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Apr

20

May

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Jul 2

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Aug

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Sep

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Feb

21

Daily Deaths

23 Feb 21: 2,196

Turning the Corner on the PandemicNationwide COVID-19 Metrics Since April 1, 2020: 7-Day Average Lines

Source: The COVID Tracking Project. As of 23 Feb 21

3

20,400

20,000

19,600

19,200

18,800

18,400

18,000

17,600

17,200

2015 2016 2017 2018 2019 2020 2021

Real GDP and Real Consumer Spending

2012

US

D (

billio

ns/y

ear)

Actual

Real GDP

2015-2019

GDP Trend

Source: Bureau of Economic Analysis. As of 31 Dec 20

Path Necessary

to Return to

Trend by 4Q21

(7.5% growth)

US Growth Expected to Bounce Back After a Tough 2020

Real GDP Trajectory

4

0

1000

2000

3000

4000

5000

6000

7000

2015 2016 2017 2018 2019 2020

Personal Saving

US

D (

billi

ons/

yr)

Source: Bureau of Economic Analysis. As of 31 Dec 20

Dec. Rate $2.38T,

$1.2T above trend

Consumer Fundamentals Have Improved Since the COVID-19 Shock

1700

1600

1500

1400

1300

1200

1100

2015 2016 2017 2018 2019 2020

Consumer Loans Issued by Banks

US

D (

billi

ons)

Source: Federal Reserve Board. As of 18 Jan 21

5

-0.3

2.54.7

7.35.2 5.5

8.1 8.19.6 8.6

4.82.5 2.4 2.0

3.90.9

-8.8

-1.9

0.7

-15

-10

-5

0

5

10

15

2Q16 1Q17 4Q17 3Q18 2Q19 1Q20 4Q20E

S&P 500 Revenue Growth (Year Over Year)

Source: S&P, Thomson Financial, Factset, Credit Suisse. As of 31 Dec 20

-1.7

4.79.0

15.49.6 7.9

12.7

26.125.428.2

17.1

2.8 3.8 1.1 2.9

-13.6

-30.7

-6.4

1.9

-50-40-30-20-10

010203040

2Q16 1Q17 4Q17 3Q18 2Q19 1Q20 4Q20E

S&P 500 EPS Growth (Year Over Year)

Source: S&P, Thomson Financial, Factset, Credit Suisse. As of 31 Dec 20

6.1

-6.6

3.7 3.4

-12.5-0.5

-10.3-3.0

-22.6-11.9

-41.7

-98.3

21.6 20.8 18.8

1.09.5 5.5 3.7

-1.8 -1.9-13.3

-37.3

-104.7-120

-100

-80

-60

-40

-20

0

20

40

MAT FIN TECH HC COMM CS S&P UTL CD RE IND ENE

Per

cent

S&P 500 4Q20 Expected EPS Growth Rates

01 Jan 21 Feb 2021

Source: Refinitiv. As of Feb 2021

Corporate Earnings Much Better Than Initial Expectations

6

1.94

0

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Yie

ld to

Wor

st (

%)

Bloomberg Barclays US Credit Index Yields

Source: Bloomberg Barclays. As of 23 Feb 21

Investment-Grade Credit Reaching New Milestones

Cycle of Local Tights Feb-97 Feb-07 Jun-14 Feb-18 Jan-20 Feb-21

Index OAS (bps) 56 82 97 85 93 88

Index Yield (%) 7.11% 5.64% 2.97% 3.54% 2.71% 1.93%

Average Credit Quality A+/A A/A- A/A- A-/BBB+ A-/BBB+ A-/BBB+

% BBB 28% 35% 43% 48% 50% 50%

Index Duration 6.2 6.3 7.0 7.6 8.0 8.5

Index Average Dollar Price (USD) 101.21 102.48 108.69 103.56 110.53 112.87

Median IG Gross Leverage 1.36x 1.60x 1.93x 2.30x 2.40x 2.40x*

T12M Excess Return Vol 0.40% 0.60% 2.20% 1.40% 3.20% 3.4%**

*Estimated YE2021 leverage returns to pre-COVID level

**Shows T6M Volatility for current

Source: Morgan Stanley Research, Bloomberg, FTSE Fixed Income.

7

0

10

20

30

40

50

60

70

80

90

1990 1994 1998 2002 2006 2010 2014 2018

Per

cent

Bloomberg Barclays US Credit Index Yields

Source: Bloomberg Barclays. As of 23 Feb 21

0

100

200

300

400

500

600

1990 1994 1998 2002 2006 2010 2014 2018

Blo

ombe

rg B

arcl

ays

US

Cre

dit I

ndex

OA

S (

bps)

Bloomberg Barclays US Credit Index Spreads

Source: Bloomberg Barclays. As of 23 Feb 21

Investment-Grade Credit: Historical Perspective

Option-Adjusted Spread as Percentage of Yield

IG Spreads Have Traded Below 100 bps for

Extended Periods in the Past

8

Bank Loan

Investment-GradeHigh-Yield

-20

0

20

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

US

D (

billi

ons)

Cumulative Retail Flows by Asset Class

Source: Morningstar. As of 31 Jan 21

Investment-Grade Credit Has Dominated Retail Credit Flows

9

-100

-50

0

50

100

150

200

2010 2012 2014 2016 2018 2020

OA

S D

iffer

ence

(bp

s)

Source: Citi Research, FTSE Index. As of 18 Feb 21

-5.50

-5.00

-4.50

-4.00

-3.50

-3.00

-2.50

-2.00

2010 2012 2014 2016 2018 2020

Dur

atio

n D

iffer

ence

(yr

s)Source: Citi Research, FTSE Index. As of 18 Feb 21

High-Yield Credit: “Carry Your Way to Greatness”

Spread Advantage of BB/B vs. Long Duration Duration Gap Between BB/B vs. Long Duration

10

0%

2%

4%

6%

8%

10%

12%

14%

16%

-36 -24 -12 0 12 24 36

LTM Default Rate in Past Cycles

1991 2002 2009 2017 2020

Source: Morgan Stanley Research, Moody'sNote: Shows Moodys' count-weighted speculative grade default rate.

High-Yield Credit: Improving Default Trends and Return Prospects

1.2%

-1.3%

4.0%

6.4%

-8%

-4%

0%

4%

8%

12%

Above Avg &Rising

Above Avg &Falling

Below Avg &Falling

Below Avg &Rising

US HY XS Fwd 12m Returns by Inflation Bucket

Source: Bloomberg, Morgan Stanley ResearchNote: We use excess returns from 1970 or whenever history begins. Blue dot shows median while blue bars show interquartile range.

High-Yield Outperforms When Inflation

Is Below Trend and Rising

11

High-Yield Credit: Spread as a Percentage of Overall Yield

Median: 165%

0%

500%

1000%

1500%

2000%

2500%

3000%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Bloomberg Barclays US High-Yield Index Option-Adjusted Spread as a Percent of 5-Year Treasury Yield

Max = 2388%(31 Jul 2020)

Source: Bloomberg. As of 29 Jan 21

12

-15

-10

-5

0

5

10

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

US

D (

billi

ons)

Leveraged Loan Fund Flows

Source: J.P. Morgan. As of 04 Feb 21

-3%

-2%

-1%

0%

1%

2%

3%

4%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Rolling 3-Month Loan Flows as a Percent of Asset Class

Source: J.P. Morgan, S&P LCD. As of 31 Dec 20

Bank Loans: Strong Technicals Expected to Boost Demand

Emerging Markets, 4.6

Muni, 13.3

Mortgage, 3.6

Leveraged Loan, 1.5

High-Yield, 9.6

Investment-Grade, 67.4

Fund Shares by Asset Class (%)

Source: Citi Research, EPFR. As of 31 Dec 20

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eb 1

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21

Bas

is P

oint

s

US CLO 2.0/3.0 New-Issue Spreads

AAA AA A BBB BB LL Index¹

¹S&P/LSTA Leveraged Loan IndexSource: BofA Global Research, S&P Global Market Intelligence, a division of S&P Global Inc. As of 19 Feb 21

CLO Tranche New-Issue Spreads

14

Structured Credit: CMBS Has Lagged the Broad Recovery

Sector YTD YoY Since Peak

CMBS AAA -0.7% 4.9% 4.3%

CMBS BBB- 5.4% -8.9% -9.4%

IG Corp -2.4% 4.0% 3.5%

HY Corp 1.3% 7.2% 7.2%

US Treasuries -2.5% 3.0% 2.3%

US Long Maturity Ts -8.8% 0.4% -1.4%

S&P 500 4.2% 17.4% 19.1%

Equity REITs 4.6% -7.7% -9.3%

Industrial 4.6% 7.9% 6.6%

Office 0.3% -27.8% -28.0%

Strips 19.3% -8.0% -9.9%

Malls 28.2% -16.7% -19.8%

Apartments 10.5% -12.8% -14.3%

Manufactured Housing -0.4% -10.3% -12.4%

Single Family Rental 2.6% 1.2% 2.2%

Healthcare 3.7% -11.6% -13.5%

Storage 3.1% 13.2% 10.2%

Triple Net 2.6% -8.9% -11.5%

Lodging 16.6% -5.8% -8.3%

Student Housing 1.3% -5.4% -7.1%

Data Center -3.7% 7.2% 4.2%

Infrastructure 1.0% -3.3% -4.0%

Source: Thomson Reuters, SNL Financial, Morgan Stanley Research. As of 19 Feb 21

15

A

BBB

BB

50

150

250

350

450

550

650

750

850

950

2017 2018 2019 2020

Bas

is P

oint

s

Emerging Markets OAS History

Source: Bloomberg Barclays. As of 29 Jan 21

EM A minus US A

EM BBB minus US BBB

0

20

40

60

80

100

120

140

160

180

200

2012 2013 2014 2015 2017 2018 2019 2020

EM USD Corporate Yields Are CurrentlyHigher Than US CorporateYields

Source: Bloomberg, J.P. Morgan. As of 31 Jan 21B

asis

Poi

nts

Emerging Markets Offer Attractive Outright and Relative Spread Opportunities

16

BBB CMBX

HY CDX

0

200

400

600

800

1000

1200

1400

Jan 18 Jul 18 Jan 19 Jul 19 Jan 20 Jul 20 Jan 21

Bas

is P

oint

s

Comparative Spreads

Source: Bloomberg, Markit, Morgan Stanley Research. As of 22 Feb 21

Relative Value: BBB CMBS Spreads Remain Wide Relative to HY

Comparative Spreads

17

25%

31%

20%

10%

8%

6%

15%

24%

28%

15%

10%9%

0%

5%

10%

15%

20%

25%

30%

35%

<250 bps 250bp – 350bp 350bp – 450bp 450bp – 550bp 550bp – 750bp >= 750bp

Per

cent

of U

nive

rse

Spread Buckets for High-Yield Bonds and Bank Loans

High-Yield Bonds

Bank Loans

Source: J.P. Morgan. As of 22 Feb 21

Relative Value: High-Yield vs. Bank Loans

18

US CLO AAA (left)

US CLO BB (right)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0

50

100

150

200

250

300

350

400

450

2012 2013 2014 2015 2016 2017 2018 2019 2020

Discount M

argin (bps)Dis

coun

t Mar

gin

(bps

)

US CLO Comparative Spreads

Source: J.P. Morgan. As of 22 Feb 21

US Credit (left)

US Mortgage-Backed Securities (right)

0

20

40

60

80

100

120

140

160

180

0

50

100

150

200

250

300

350

400

2019 2020

Option-A

djusted Spread (bps)

Opt

ion-

Adj

uste

d S

prea

d (b

ps)

US IG Looks Wide vs. US MBS

Source: Bloomberg Barclays. As of 22 Feb 21

Relative Value: CLO Tranches, IG and Agency Mortgages

19

Questions & Answers

20

Thank you.

21

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