US Credit Alpha：Eyes on the prize

USCreditAlpha Eyesontheprize Thisweek,weanalyzethebreadthofsystematicinvestingincredit,highlightopportunitieswithinsmallcapsininvestmentgrade,andrefreshourFY24forecastsforIG,highyield,andleveragedloans. USCreditAlpha Overview.2 Asofter-than-expectedCPIprinthaseasedstagflationconcernsandspurredawidespreadrally.Equitieshavereachedall-timehighs,Treasuryyieldshavefallen,andCDXhasrallied.IGandHYcashhavelaggedduetoelevatedsupplyandincreaseddealerbalancesheets.WeupdateourYE24forecastsforIG,HY,andloans. Focus Systematiccredit:Onlygrowingfromhere.4 Weestimatethat$90-140bniscurrentlydeployedinsystematicstrategiesinUSinvestmentgradeandhighyieldcashbonds,andweexpecttheamounttogrowfromhere.Weprovideanoverviewofthesystematiccreditlandscapeandhighlightsomeofthemorepopularstrategies. InvestmentGrade Smallcaps,strongviews.17 Smallerissuersarelessfollowedbymarketparticipants,butwithindexspreadsnearthetightestlevelssincepre-GFCandliquidityinsmallercreditsimprovingaspartofthe"equitificationofcredit,"smallcapissuerscouldhaveanoutsizedeffectonreturns.Wehighlightourtradeideasinissuerswith<$2.5bndebt. HighYieldandLeveragedLoans Mid-yearreturnsforecastupdate.36 Weextendourhighyieldspreadforecastof290-315bptoYE24,correspondingtoa5.0-5.5%totalreturn/2.0-2.5%excessreturnforFY24.Inloans,weforecastthattheLLIwillend2024at $97.0-97.5,whichwouldleadtoFY24totalreturnsof8.5-9.0%andexcessreturnsof3.5-4.0%. FOCUS BradleyRogoff,CFA +12124127921 bradley.rogoff@barclays.comBCI,US DominiqueToublan +12124123841 dominique.toublan@barclays.comBCI,US ThisdocumentisintendedforinstitutionalinvestorsandisnotsubjecttoalloftheindependenceanddisclosurestandardsapplicabletodebtresearchreportspreparedforretailinvestorsunderU.S.FINRARule2242.Barclaystradesthesecuritiescoveredinthisreportforitsownaccountandonadiscretionarybasisonbehalfofcertainclients.Suchtradinginterestsmaybecontrarytotherecommendationsofferedinthisreport. Pleaseseeanalystcertificationsandimportantdisclosuresbeginningonpage42. Completed:16-May-24,21:54GMTReleased:17-May-24,10:30GMTRestricted-External USCreditAlpha Overview Asofter-than-expectedCPIprinthaseasedstagflationconcernsandspurredawidespreadrally.Equitieshavereachedall-timehighs,Treasuryyieldshavefallen,andCDXhasrallied.IGandHYcashhavelaggedduetoelevatedsupplyandincreaseddealerbalancesheets.WeupdateourYE24forecastsforIG,HY,andloans. Eyesontheprize TheFedfinallycaughtabreakwiththisweek'sinflationprint.AprilheadlineandcoreCPIbothcameinsofterthanexpected,at0.3%m/mversusconsensusexpectationsof0.4%.Afterlastmonth'sre-acceleration,whichthrewtheFed'scampaignintoquestion,CPI'ssurprisedecelerationwaswarmlywelcomedbyinvestors,withpositivesentimentfloodingthemarketandratecutexpectationsgrowingclosertotwofortheyear,comparedwithslightlyabove1.5lastweek.ThedatamarkedthefirstsurprisetothedownsideforinflationsincelastOctober'sprint,whenheadlineandcorecameinat0.0%and0.2%m/mwhileconsensuswasfor0.1%and0.2%m/m. Amidthegoodnews,badnewshasbeenignored.DespitethepositiveCPIprint,economicdataoverthepastweekhavenotbeenallsunshineandrainbows.PPIcameinmuchhotterthanexpected(0.5%m/mversus0.2%m/mexpectations),butastrongrevisiondownwardtoMarch'sprinthelpedoffsetconcerns,andUSTswereactuallylowerontheday.WithWednesday'sfocusonCPI,astrongmisstothedownsideforretailsales(0.0%m/mvs.0.4%m/mexpected,0.7%m/mprior)didnotcausemuchconcern,andBarclaysEconomicsbelievesthatconsumersremainwellpositionedforresiliencedespitethesofterprint(seeAprilRetailSales:Takingabreather).Still,dataandcompaniesarebothindicatingsomesoftnessintheconsumerenvironment.Onthecompanyside,themessagehasbeenmixed.Somecompanies,includingMcDonald'sandStarbucks,reportedsofteningdemand,butWalmartwasnotasnegative.Onthedatasidefor1Q24,30-daydelinquencies(ie,thenumberofnewdelinquencies)aregrowingrapidlyforcreditcardsandautos,reachingtheworstlevelssincetheaftermathoftheGFCforsomepartsoftheconsumerspectrum.Thissoftnessontheconsumerside,ifitpersists,shouldpreventasustainedrallytomuchtighterspreads. Therisk-onenvironmentisback,withequitiesattheall-timehighsandUSTsrallying.Inthewakeofthisweek'sdata,theS&P500reachedall-timehighs,theDJIAcrossed40,000forthefirsttimeonrecord,andalthoughnotashistoricallyelevated,theRussell2000alsopostedgains.TreasurieshaveralliedacrossthecurveasthemarketbeginstorollbackconcernsthatstagflationwillcompromisetheFed'splansforcutsin2024.Therisk-onnarrativecomesasweenteralullonthemacrofront-thenextsignificantroundofdatawillnotbereleaseduntiltheendofMay-whichmightgivethecurrentrallyroomtorun. Onthecreditside,CDXhasledtherallywhilecashhaslagged.ImmediatelyaftertheCPIrelease,CDXIGtradedinsideof50bpandCDXHYroseabove$107forthefirsttimesinceMarch. CORE BradleyRogoff,CFA +12124127921 bradley.rogoff@barclays.comBCI,US DominiqueToublan +12124123841 dominique.toublan@barclays.comBCI,US Barclays|USCreditAlpha:Eyesontheprize Liquidcreditproductshavereactedmostnoticeablyinthisrally,whilecashspreadshavebeenleftabitinthedust.Investmentgradecashhasclosedeachdaythisweekat88bp,andhighyieldhashoveredbetween301a