Barclays_US_Credit_Alpha_2016_redux
This document is intended for institutional investors and is not subject to all of theindependence and disclosure standards applicable to debt research reports prepared for retailinvestors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for itsown account and on a discretionary basis on behalf of certain clients. Such trading interestsmay be contrary to the recommendations offered in this report.Please see analyst certifications and important disclosures beginning on page 45.US Credit Alpha2016 reduxWe recap market moves in the wake of the US election and offerrecommendations for future positioning. We also create arelative value framework for BDCs and project intra-IG andintra-HY rating migrations in 2025. US Credit AlphaOverview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3We expect tighter spreads and compression in the short term, given structurally higher yields.The election's swift results eased markets' worst fears and have spurred a widespread risk-onsentiment. Unknowns persist with regard to future policy implementation.FocusRed wave washes over markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Risk assets rallied significantly following the results of the US election, albeit with somedifferentiation beneath the surface. With a red wave appearing likely, we highlight opportunitiesacross macro credit instruments and IG and HY cash sectors to position for the road ahead.FocusBDCs: A case of unsecured insecurity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19BDCs use secured debt to optimize borrowing costs, but this encumbers a large portion of theirinvestments, leaving unsecured creditors supported by residual claims and lower-qualityunpledged assets. The risk is not uniform across the sector. We deconstruct BDCs' balancesheets to frame relative value.Investment GradeSingle-A downgrades more punitive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32We screen for candidates likely to migrate in/out of the single-A index in 2025. After upgradesinto single-As outpaced downgrades drastically in the past two years, the upgrade-downgraderatio fell to 1.0x in 2024. Spreads had a higher sensitivity to downgrades than upgrades, as tightspreads leave little room for error. FICC ResearchCredit Strategy8 November 2024FOCUSBradley Rogoff, CFA+1 212 412 7921bradley.rogoff@barclays.comBCI, USDominique Toublan+1 212 412 3841dominique.toublan@barclays.comBCI, USCompleted: 08-Nov-24, 02:29 GMT Released: 08-Nov-24, 11:30 GMTRestricted - ExternalHigh YieldSteady composition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37We expect the ratings makeup of the high yield market to remain fairly static in 2025, withmigrations between cohorts tending to cancel each other out. We find that bonds on the cusp ofa ratings boundary transition within a year about half the
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