Morgan Stanley Fixed-US Credit Mid-Year Outlook Presentation Macro and Micro-108470347.pdf

AllinformationasofMay31,2024,unlessotherwiseindicated.MorganStanleydoesandseekstodobusinesswithcompaniescoveredinMorganStanleyResearch.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofMorganStanleyResearch.InvestorsshouldconsiderMorganStanleyResearchasonlyasinglefactorinmakingtheirinvestmentdecision.Foranalystcertificationandotherimportantdisclosures,refertotheDisclosureSection,locatedattheendofthisreport.MORGANSTANLEYRESEARCHNorthAmericaMorganStanley&Co.LLCVishwasPatkarStrategistVishwas.Patkar@morganstanley.com+1212.761.8041DavidHamburgerCreditAnalystDavid.Hamburger@morganstanley.com+1212.761.1580LindsayTylerCreditAnalystLindsay.Tyler@morganstanley.com+1212.761.2734JennaGiannelliCreditAnalystJenna.Giannelli@morganstanley.com+1212.761.4340BrianGibbonsCreditAnalystBrian.Gibbons@morganstanley.com+1212.761.2110USCreditResearchMid-YearOutlookPresentation:Loan-lyattheTopMay31,202408:20PMGMTofthislineofthisline2Inthe(GDP)Zone:Thereisalottolikeaboutthemacrosetupforcredit–slowingbutrobustgrowth(2.1%4Q/4Q),improvingearnings,startofratecuts,healthyall-inyields,andmodestsupply.Tightspreadsmeanthatcreditmaynotcontinueitsoutperformancevs.othermarkets,butabsoluteperformance–bothexcessandtotal–remainrespectable.WehaveahighconvictionpreferenceforLoansthroughashalloweasingcycle,followedbyIG.HYvaluationslooktherichest,butaggregatefundamentalsremainhealthy.USInvestmentGrade–TheYieldisRight:Weexpectspreadstogrindtighterto80bp–levelsnotseensincebeforetheGFC–generatingpositiveexcessreturnsandstrongtotalreturns(~10%).Demandshouldacceleratefrommultiplepocketsasfixedannuitysales,pensionsde-risking,andassetrotationoutofmoneymarketfundsaddfueltoalreadystrongmutualfund/ETFinflows.Acrossmaturities,welikethefrontend(especially3-5Y)andexpectthelong-endtoremainanchored.WelikelowBBBs,moneycenterbanks,energyandutilities.USLeveragedCredit–RisingDispersion,LoansoverBonds:WeexpectspreadstomovesidewaysinHY(300bp)andtighterinLoans(400bp)through2Q25.WelikeLoansoverHYgiventhebettercarryprofile,improvingcoverageratiosandmorefavorabletechnicals.WecloseourCCCoverweightgivenYTDcompressionandashallowereasingpaththatdelaysbalancesheetrepair.WelikeSingle-BLoansandaCCC/BBbarbellinHY.WearecautiousonsmallerB-ratedcapitalstructuresinHYthathaveruntoofar.AShallowbutStickyDefaultCyclewithLowerRecoveries:Wecontinuetoanticipateaflatterbutlongerdefaultcyclethatpeaksintheneartermandgraduallydeclinesfromthere.Weexpect3.5%defaultsforHYand3.75%defaultsinLoans(includingdistressedexchanges)throughmid-2025.LoosecovenantqualityandtherisingtrendofaggressiveLMEtransactionskeepuscautiousonlowerrecoveries.Derivatives:Weprefercashrisktosyntheticsgivenhealthyfixedincometechnicalsbenefittingtheformer,whilethelatterisnegativelyconvexattheselevels.WelikeHYseniormezzaninetranches(HY4125-35%)asacheaphedgewithgoodconvexity.USCreditStrategy|ExecutiveSummaryofthislineofthisline3InIG&HYTMT,oursectoranalystsandinvestorsarefocusedonbroadbandcompetition,potentialACPsubscriberlos