Performing Credit Quarterly 2Q2024: The Dual Economy

Summary

• The U.S. economy shows conflicting trends with stock markets reaching unprecedented heights while lower-income consumers face high interest rates and depleted pandemic savings.
• Wealth concentration in the highest income deciles has expanded asset bases, driving increased investment activity and upward pressure on asset prices.
• Capital markets remain generous despite elevated interest rates, allowing highly levered companies to refinance debt and postpone potential financial problems.
• The Federal Reserve receives mixed signals including booming financial markets, low but rising unemployment, and declining but still elevated inflation, making aggressive rate cuts unlikely in the near term.
• Consumer confidence remains low with only one-third of consumers maintaining a positive outlook due to high costs for essential goods.
• Over 75% of consumers report buying smaller quantities of products or delaying large purchases, indicating worsening economic conditions for lower- and middle-income households.
• Debt service as a percentage of disposable income returned to 2019 levels by mid-2024 after stimulus checks ceased, while credit card debt exceeded $1 trillion.
• Credit card delinquencies reached levels not seen since 2011, and the U.S. personal savings rate fell to 3.9% in May, below the long-term average of 8.4%.
• Retail businesses catering to middle- and lower-middle classes, such as Kohl's, underperformed earnings expectations in the first quarter of 2024 due to pressure on their consumer base.
• Global billionaires reached a record number in 2024 with combined wealth exceeding $14 trillion, while large U.S. companies hold over $4 trillion in aggregate cash reserves.
• Share buybacks are expected to exceed $1 trillion in the U.S. in 2025, potentially acting as a catalyst for further equity market appreciation.
• Wealthy individuals are increasingly accessing private markets through business development companies, whose assets under management grew by more than 20% year-over-year in the first quarter of 2024.
• Private credit refinanced roughly $20 billion of broadly syndicated loans in 2023, helping to reduce U.S. leveraged loan maturities set for 2024-2026 from $268 billion to $121 billion.
• Unemployment levels in the U.S. ticked up to 4.0% in recent months, marking the first rise since 2021.
• CLO issuance hit record-high levels in the second quarter of 2024, with U.S. issuance reaching $104.6 billion year-to-date compared to $55.96 billion in the same period in 2023.
• Demand for CLO debt has driven spreads on AAA-rated CLO debt to contract to roughly 150 basis points, creating a supportive environment for senior loans.
• The Treasury yield curve shifted upward in the second quarter, with the 10-year Treasury yield rising by 20 basis points to 4.4%.
• Market pricing for interest rate cuts before year-end dropped to roughly 45 basis points from nearly 70 basis points at the start of the quarter.
• The Federal Reserve's June dot plot indicated only one rate cut of around 25 basis points is likely before year-end.
• Synthetic risk transfers (SRT) are expected to grow meaningfully in the U.S. in 2024, with issuance estimated to be roughly quadruple 2023 levels.
• U.S. high yield bond yields rose slightly in the second quarter of 2024, with over 40% of bonds having yields above 7% at quarter-end.
• BB-rated bonds returned 1.3% in the second quarter of 2024, outperforming B-rated bonds which returned 1.0%.