2022 Global Credit Outlook - GS

17 November 2021 | 5:51PM EST
2022 Global Credit Outlook: Between a rock and a hard

place
Back to the wall in 2022. We expect modest spread widening, low returns, and Lotfi Karoui
+1(917)343-1548 | lotfi.karoui@gs.com
higher dispersion, given incrementally weaker top-down and bottom-up drivers of Goldman Sachs & Co. LLC
risk appetite. Across the quality and capital structure seniority spectrums, the scope Amanda Lynam, CPA
+1(212)902-9238 |
for compression is limited, in our view. That said, owning high carry instruments still amanda.lynam@gs.com
Goldman Sachs & Co. LLC
makes sense in situations where the carry in “low beta” securities is too thin to
Marty Young
withstand even a modest move wider in spreads. Within the broader credit universe, +1(917)343-3214 | marty.young@gs.com
we think the prospects of low returns will continue to stimulate the appetite for
Spencer Rogers, CFA
illiquid segments, such as private debt markets, as well as more complex +1(801)884-1104 |
spencer.rogers@gs.com
instruments, such as structured products. We see two main sources of downside
risk to this outlook: lingering inflationary pressures on the macro side and excessive Michael Puempel, Ph.D.
+1(212)357-8483 |
michael.puempel@gs.com
shareholder-friendliness on the micro side. Goldman Sachs & Co. LLC
Marcelo Manzo
Sector allocation: Time for some dispersion. Three pillars underpin our sector +1(801)884-1910 |
marcelo.manzo@gs.com
allocation recommendations: 1. bondholder-friendliness; 2. pricing power in the face Goldman Sachs & Co. LLC
of persistent supply chain disruptions and inflationary headwinds; 3. exposure to the

final leg of the re-opening. In both the USD IG and HY markets, we recommend
overweight allocations to Energy and Financials – sectors with a clear focus on
bondholder-friendly capital management. Similarly, we favor re-opening-sensitive
sectors, such as Airlines, Aerospace & Defense, Gaming, Lodging, and Restaurants.
In HY, we see value in Food & Beverage, given the sector’s strong pricing power.
Elevated valuations, weak pricing power and high event risk leave us underweight on
Pharmaceuticals in IG, as well as Technology and Consumer Products in both IG and
HY.
Relative value: Managing the left tail. Given our directional view on the market,
we favor relative value themes that mitigate downside risks for returns. These
include: 1. A neutral allocation on IG vs. agency MBS; 2. A preference for EUR
spreads over their USD peers; 3. Overweight BBBs vs. higher rated bonds in the
USD IG market; 4. Overweight BBs vs. BBBs for unconstrained investors; 5.
Overweight BBs and Bs vs. CCCs in the USD HY market; 6. Overweight 30s vs. 10s
in the USD IG market; 7. Overweight leveraged loans vs. HY bonds; 8. Overweight
CLOs vs. plain vanilla bonds; 9. Overweight AT1, HY, and hybrid bonds vs. IG in the
EUR market; 10. Long synthetic vs. cash instruments.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.
Goldman Sachs
Between a rock and a hard place
Modest widening, low returns and higher dispersion

Going into 2021, we forecasted that a combination of tighter spreads and subdued
realized volatility would fuel decent returns and solid Sharpe ratios. Key to this view was
our expectation that the reopening of the economy would allow corporate balance sheet
fundamentals to recoup most of the damage that was inflicted by the prior year’s
sudden stop in the economy. At the same time, continued policy support and the
vaccine rollout would further boost investors’ confidence in the durability of the
recovery. With 2021 coming to a close, the performance of the asset class is solidly on
track to exceed our initial optimistic expectations, as strong search-for-yield motives
have pushed spreads to the very low end of their historical ranges, particularly in the
USD IG and HY markets.
For 2022, we expect spreads will drift modestly wider (Exhibit 1). Barring an unlikely
selloff in the final stretch of 2021, this modest spread widening will prove enough to
push excess returns to the low end of their historical distributions (Exhibits 2 and 3). This
is particularly the case for the USD IG market, where we forecast slightly negative
excess returns for the full year. More generally, we think 2022 will mark the beginning of
a new phase in this cycle – one where thin risk premia severely constrain future returns.
Exhibit 1: We expect a gradual rebuild of risk premium that will Exhibit 2: 2022 will also likely feature low to negative excess
realign spreads with the reality of a maturing cycle returns
Our 2022 spread forecasts for the USD and EUR markets Our 2022 cumulative excess return forecasts for the USD and EUR
markets
Updated through Nov 15, 2021 Updated through November 15, 2021
Market
Current 2021Q4 2022Q1 2022Q2 2022Q3 2022Q4 Excess return forecasts
Market 2021 YTD (%)
Current
USD Spreads excess
Duration Rest of
return (%) 2022E
IG 89 89 91 98 102 103 2021
IG Fin 81 81 84 90 93 94 USD excess returns
IG Non-Fin 92 92 96 102 106 108
Investment Grade 8.8 1.8 0.1 -0.2
High Yield 285 285 305 330 345 350
EUR Spreads High Yield 3.9 6.2 0.4 0.5
IG 107 107 108 109 110 112

EUR excess return
IG Fin 116 116 117 118 119 120
Investment Grade 5.4 0.5 0.1 0.9
IG Non-Fin 103 103 104 105 106 107
High Yield 329 330 335 345 360 365 High Yield 3.2 4.5 0.4 2.3
Source: Bloomberg, iBoxx, ICE-BAML, Goldman Sachs Global Investment Research Source: Bloomberg, iBoxx, ICE-BAML, Goldman Sachs Global Investment Research
17 November 2021 2
Goldman Sachs
Exhibit 3: In both USD IG and HY, our 2022 full-year excess return forecasts are at the low end of the
historical range
30% 2021: ~6.7% 20%
2022E: 0.5%
25%
16%
2022E: -0.2%
20%
2021: ~2.2%
12%
15%
8%
10%
4%
5%
0% 0%
[10%, 20%)
>8%
[-5%, -4%)
[-4%, -2%)
[-10%, -6%)
[-6%, -3%)
[8%, 10%)
<-20%
>20%
<-5%
[-20%, -10%)
[4%, 6%)
[0%, 5%)
[-2%, 0%)
[0%, 2%)
[2%, 4%)
[6%, 8%)
[-3%, 0%)
[5%, 8%)
IG (LHS) HY (RHS)
Annual excess returns
Source: Bloomberg, Goldman Sachs Global Investment Research
Aside from valuation constraints, we expect the top-down and bottom-up drivers of risk
appetite will turn incrementally less supportive as the cycle continues to mature. On the
macro side, our economists’ global growth forecasts are now, for the most part, in line
with or below consensus, which leaves us comfortable with the notion that much of the
near-term re-acceleration in economic activity is likely priced in. We also see little scope
for Fed policy to surprise to the dovish side given current upward pressures on inflation.
The current timeline for the tapering of Agency MBS and Treasury bond purchases and
the prospect of a liftoff by mid-2022 essentially pave the way for a return of “cash” as
an investable asset class. This return will undermine the value proposition of
short-duration and high-quality corporate bonds and ease the “urgency” of buying the
dip and staying invested.
On the micro side, and as we further detail below, we think the fundamental backdrop
will remain benign in terms of default and negative rating migration risks. But here
again, relative to 2021, we expect an incrementally less friendly environment, as the
mindset of corporate managements continues to shift away from balance sheet repair
mode into more aggressive capital management plans involving a stronger focus on
business investment and shareholder returns. This shift should also fuel greater
dispersion in returns across both sectors and issuers.
Across currencies, we think the picture will likely be friendlier in the Euro area. Like in
the US, aggregate demand in the Euro area is poised to remain strong in 2022, buoyed
by a positive growth impulse from the EU Recovery Fund as well as expansionary fiscal
policy in Germany. But unlike the US, our economists expect a more benign inflation
backdrop, which leaves plenty of scope for monetary policy to surprise to the dovish
side relative to current market pricing (Exhibit 4). Mainly for this reason, they forecast
that the first 10bp Deposit Rate hike will occur in the third quarter of 2024, well beyond
17 November 2021 3
Goldman Sachs
current market pricing, which is for late 2022. They also continue to forecast that the
PEPP will be concluded in March 2022, followed by a temporary “APP bridge” over the
remainder of 2022. This policy gap is the key driver of our relatively more constructive
view on EUR spreads vs. their USD peers (again, Exhibits 1 and 2).
To be clear, the risk premium rebuild that we envision would realign spreads with the
reality of a cycle that is maturing but not inflecting. As the debate about the age of the
cycle continues to gain more traction among market participants, particularly in light of
the significant flattening of the US Treasury yield curve, concerns over the longevity of
the cycle may intensify and fuel a larger repricing of risk than implied by our forecasts.
We would most likely view such an outcome as opportunity to add risk. While the pace
of the recovery will decelerate, as it should, the absolute level of growth will remain
elevated in upcoming months, given the strong tailwind from pent-up savings and
inventory rebuilding as well as the positive news flow on the virus front – all of which
still imply that the likelihood of a recession is fairly low.
Exhibit 4: We expect a sizeable policy gap will emerge between the Fed and the ECB
% US Fed Funds Rate % % Euro Area deposit Rate %
3.0 GS Baseline 3.0 0.0 GS Baseline 0.0
Market Pricing Market Pricing
Bloomberg Consensus Bloomberg Consensus
2.5 2.5 -0.1 -0.1
2.0 2.0 -0.2 -0.2
1.5 1.5 -0.3 -0.3
1.0 1.0 -0.4 -0.4
0.5 0.5 -0.5 -0.5
0.0 0.0 -0.6 -0.6

2020 2021 2022 2023 2024 2020 2021 2022 2023 2024
No scope for rating compression but owning high carry still makes sense in some
pockets
While somewhat modest, the risk premium repricing that we expect naturally limits the
scope for material compression across the quality and capital structure seniority
spectra. Across the board, we therefore think the strong rating and seniority
compression pattern that has prevailed over the past 18 months is highly unlikely to
repeat itself. That said, staying down in the quality and seniority spectra still makes
sense to us in a number of situations. This view may seem inconsistent with our call on
the absolute direction of the market. But the spread carry in the high end of the quality
spectrum is just too thin to withstand a modest move wider in spreads. The USD IG
market perfectly illustrates this fragility, with roughly 10bp of spread widening enough to
offset an entire year of spread carry. Of course, the key risk to this view is a more
pronounced spread widening than our forecasts – a risk that cannot be ruled out,
particularly if market participants grow anxious over the durability of the recovery, and
one that underscores the narrowness of the path going forward.
Where does all of this leave us? In the USD market, we think the thin spread carry
17 November 2021 4
Goldman Sachs
provided by the IG market, coupled with the decent lengthening of duration since 2018,
leaves returns quite vulnerable to even a modest move wider in spreads (as per our own
negative excess return forecasts). This fragility warrants a small overweight allocation on
HY, given a somewhat more comfortable carry buffer and a benign default backdrop
(more below). A similar rationale also leaves us comfortable staying overweight on
BBB-rated bonds vs. their higher rated peers within IG – a view that is also reflected in
our sector allocation recommendations (more below). For cross-over investors, and as
we showed in recent research, the structurally high excess premium embedded in
BB-rated bonds and the scope for continued positive momentum in rising stars leave
them well-positioned to deliver superior risk-adjusted returns. Lastly, we like the higher
carry available in CLOs vs. similarly rated corporate bonds, with a preference for AAA
CLOs over IG-rated bonds and BBB/BB CLOs over HY-rated bonds.
In the EUR market, we think the bid for carry will remain strong, as it has been through
most of 2021. This leaves us constructive on EUR high carry securities such as HY
bonds, AT1 bonds, and hybrids, which we expect will outperform IG bonds on a
risk-adjusted basis. Relative to the USD market, the shorter duration of the EUR IG
market as well as its higher spread carry (at least at the index level) is comforting. But
the prospect of a slower and more gradual normalization of monetary support, coupled
with the strong portfolio rebalancing incentives powered by the ECB purchases (even
post-PEPP) leaves the case for high carry securities quite strong, in our view.
There are two exceptions to the above “long carry” themes. The first is a neutral view
on IG-rated bonds over agency MBS. Despite the higher carry offered by IG-rated bonds,
we think risk is more asymmetrically skewed to the downside relative to agency MBS,
where we see little incremental news now that the Fed has clarified its tapering
timeline. The second is our underweight allocation on CCC-rated bonds, which is largely
informed by their unattractive valuations, both in absolute and relative terms. As shown
in Exhibit 5, the spread pickup provided by CCC-rated bonds over their higher rated
peers is at historically tight levels. Some of the compression of the past year and a half
likely reflects a positive survivorship bias in the CCC universe after 2020’s wave of
defaults. Still, we struggle to see a strong case for further compression going forward.
In fact, even after adjusting for forward expected losses, the excess credit risk premium
(CRP) in the CCC bucket is still lower than in the higher end of the rating spectrum
(again, Exhibit 5). We would emphasize that our cumulative loss rate forecasts are
substantially lower than historical averages (Exhibit 6), which suggests a poor forward
asymmetry, in our view, at least at the index level.
17 November 2021 5
Goldman Sachs
Exhibit 5: The spread pickup offered by the CCC bucket is too thin, even after adjusting for forward losses
bp % bp %
CCC-B OAS CCC-B CRP (RHS) CCC-BB OAS CCC-BB CRP (RHS)
1,700 18 1,700 20
1,500 15 1,500
15
1,300 1,300
12
1,100 1,100
10
9
900 900
6
700 5
700
3
500 500
0
300 0 300
100 -3 100 -5
97 99 01 03 05 07 09 11 13 15 17 19 21 97 99 01 03 05 07 09 11 13 15 17 19 21
Source: ICE-BAML, Bloomberg, Moody’s, Goldman Sachs Global Investment Research
Exhibit 6: Our cumulative loss rate forecasts are below historical averages
The average loss rates are calculated over the period from 1983 to 2019
% %
Historical averages GS forecasts
22 22
20 20
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
1 2 3 4 5
Year
Source: Moody’s, Goldman Sachs Global Investment Research
Shorten duration for total returns, position for generally flatter spread curves otherwise
While the low absolute level of yields limits the risk of a material spread widening, the
shifting reality of macro and micro fundamentals have clear implications for our duration
and spread curve views. On duration, the prospect of a liftoff in the second half of the
year strengthens the case for floating rate over fixed rate structures. This reinforces our
preference for CLOs, which we favor over similarly rated fixed rate corporate bonds. It
also leaves us comfortable with our overweight recommendation on leveraged loans vs.
HY bonds. Though leveraged loans are highly unlikely to float next year, given where the
Libor floor is, we think the pressure from rising front-end and intermediate rates will
weigh on price returns for fixed rate structures like HY bonds.
17 November 2021 6
Goldman Sachs
As for spread curves, we see two drivers for some flattening going forward. First, rising
dispersion across issuers should cause some of the short-term default premium to
reprice, at least in relative terms. Second, and as discussed above, cash will gradually
establish itself as a competing asset class, which will likely redirect many natural buyers
of “quasi-safe” assets back to money market and short duration Treasury funds. This is a
similar dynamic to the one leading up to the last hiking cycle in December 2015, which
also coincided with USD IG curve flattening (Exhibit 7).
We also hold a similar view for the back-end of the USD spread curve and expect
30-year spreads to outperform 10-year maturities (per unit of duration), particularly for
non-financials (more below). The structural drivers of demand for long-duration spread
products remain firmly in place, in our view. As Exhibits 8 and 9 show, the aggregate
funded ratio for corporate pension plans remains at historically high levels, which bodes
well for future demand for long-duration fixed income securities. Anchored rates
volatility at the long-end of the curve should also support a flattening bias, especially
given that most long-duration investors are “buy and hold” (Exhibit 10).
We see two risks to this constructive view on the 30-year part of the curve. The first is a
large increase in new issue volumes – especially M&A-related funding, which tends to
be distributed well into the long-end of the curve. But given the record-high level of cash
on balance sheets, the bar is somewhat high, in our view. The second risk is higher rates
volatility at the back end of the Treasury curve, if the rates market reprices inflation risk
materially higher.
One notable pocket where we see scope for curve steepening is among the cohort of
BB-rated rising star candidates. As the upgrade decision of the rating agencies becomes
more obvious to investors, we think the front end and the belly of the spread curves will
outperform the back end.
Exhibit 7: We see further scope for underperformance in front-end USD IG spread curves, relative to
intermediate maturities
% Ratio
2-year Treasury yield 7/10-year to 1/3-year OAS ratio (RHS)
3.0 3.0
2.5 2.5
2.0 2.0
1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: ICE-BAML, Haver Analytics, Goldman Sachs Global Investment Research
17 November 2021 7
Goldman Sachs
Exhibit 8: The funded ratio for the largest corporate pension plans Exhibit 9: The typical pension glide path suggests that, as the
is the highest since 2007 funded ratio improves, the allocation to fixed income should also
The funded ratio of the Milliman 100 Pension Index, which captures the increase
100 largest defined benefit pension plans sponsored by US public Annual year-end periods shown; the funded ratio is defined as the
companies. The funded ratio represents the market value of pension market value of pension plan assets divided by the projected benefit
plan assets divided by the projected benefit obligation. obligation.
140% Funded Ratio

51%
120%
49%
Last
Fixed income allocation

100%
47%
80% 45%
60% 43%
40% 41%
20% 39%
37%
0%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 35%
(Sept) 76% 78% 80% 82% 84% 86% 88% 90% 92%
Funded ratio
Source: Milliman, Goldman Sachs Global Investment Research Note: As of year-end 2020.
Source: Milliman, Goldman Sachs Global Investment Research
Exhibit 10: Anchored rates volatility at the long end of the curve should also support a flattening bias
21-day rolling volatility on 30-year US Treasury yields
% %
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Goldman Sachs Global Investment Research
Sectors: Long bondholder-friendliness, pricing power, and the final phase of the
re-opening
Long growth and re-opening have been the two primary drivers of alpha across sectors
in 2021. As shown in Exhibits 11 and 12, Energy, Airlines, Aerospace & Defense, and
Autos outperformed their respective IG and HY indices – some by a very wide margin.
Retailers, Leisure, Metals and Mining, and Transportation Services (which includes Auto
Rentals), also did well in the HY market. And in IG, Finance Companies, Lodging,
17 November 2021 8
Goldman Sachs
Chemicals, Diversified Manufacturing, and Building Materials outperformed.
With the fastest pace of the recovery now behind us and a more challenging valuation
backdrop at hand, our sector allocation recommendations for 2022 are more nuanced,
with three key pillars underpinning them: 1. The degree of bondholder-friendliness in
sector capital allocation priorities, as we believe conservative capital management is
likely to be the exception, rather than the rule; 2. Pricing power, which determines the
vulnerability to supply chain disruptions and persistent inflationary headwinds; 3.
Exposure to the final leg of the re-opening, as potential new therapeutic treatments are
discovered/approved and existing vaccines and boosters become more widely available.
Exhibit 11: Airlines, Finance Companies, Energy and Telecom Exhibit 12: Energy and Airlines also notably outperformed in the HY
(Wirelines) have been among the strongest performing sectors in market, in addition to Retail, Leisure, and Food & Beverage
the IG market this year Year-to-date excess returns for sectors in the Bloomberg USD HY
Year-to-date excess returns for sectors in the Bloomberg USD IG Corporate Index
Corporate Index
Airlines Energy
Finance Companies Airlines
Energy Retailers
Lodging Leisure
Diversified Manufacturing Aerospace & Defense
Chemicals Transportation Services
Aerospace & Defense Metals & Mining
Building Materials Automotive
Insurance High Yield Index
Railroads Brokerage Asset Managers Exchanges
Media & Entertainment Chemicals
Automotive Finance Companies
Cyclicals
Cyclicals
Packaging Construction Machinery

IG Index Home Construction
Transportation Services Lodging
Banking
Restaurants
Media & Entertainment
Consumer Cyc Services
Technology
Metals & Mining
Consumer Cyc Services
Home Construction
Insurance
Brokerage Asset Managers Exchanges
Diversified Manufacturing
Gaming
Building Materials
Cable & Satellite Railroads
Retailers Restaurants
Construction Machinery Gaming
Banking Packaging
Technology Cable & Satellite
Wirelines Food & Beverage
Healthcare REITS
Paper Paper
REITS Consumer Products
Defensives
Supermarkets
Defensives
Healthcare
Food & Beverage Supermarkets
Utility Environmental
Consumer Products Utility
Pharmaceuticals Wireless
Environmental Wirelines
Tobacco Tobacco
Wireless Pharmaceuticals
0 1 2 3 4 5 6 7 8 0 2 4 6 8 10 12 14 16
Year-to-date excess return (%) Year-to-date excess return (%)
Note: As of November 15, 2021. Note: As of November 15, 2021.
Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Goldman Sachs Global Investment Research
In the USD IG market, we recommend overweight allocations to Energy, Banks

(Subordinated) and Insurance – sectors with a clear focus on bondholder-friendly capital
management, at times necessitated by regulatory oversight. We also favor the
re-opening sectors, as new antiviral treatments for COVID (if ultimately approved) should
pave the way for a continued normalization of business operations in Airlines, Aerospace
& Defense, Gaming, Lodging, and Restaurants. We remain cautious on tight-trading
sectors with ample debt capacity (and appetite) for shareholder returns and M&A such
as the cash-rich Technology and Pharmaceutical sectors as well as Consumer Products.
In the USD HY market, pricing power is a key consideration for managing the
17 November 2021 9
Goldman Sachs
challenging inflationary backdrop given HY firms’ generally weaker fundamentals. We

favor sectors with strong pricing power, such as Food & Beverage, where a path to IG
remains for some of the sector’s largest issuers. Conversely, we view Retail and
Consumer Products as less well positioned given the persisting supply chain disruptions
and inflationary headwinds, which may delay positive rating momentum for some
issuers. Negative event risk, in addition to tight valuations and supply chain exposure, is
a consideration behind our underweight allocation to Technology. Similar to the IG peer
group, we also recommend overweight allocations to sectors with bondholder-friendly
capital management, including Energy, Banks and Insurance. We favor the travel and
leisure exposed categories in HY, including Airlines, Aerospace & Defense, Gaming,
Restaurants, Transportation Services (includes Auto Rentals), and Leisure, as they
should benefit from the final phase of the re-opening (more below for a detailed
discussion).
The quest for higher Sharpe ratios should further boost the appetite for private debt
The prospect of low corporate bond returns in upcoming years will likely continue to
stimulate the appetite for illiquid segments of fixed income markets. This is the case for
the $1 trillion global private debt market, which will continue to cement its position as a
distinct and scalable asset class (Exhibit 13). While a popular narrative attributes the
growth of private debt markets to strong search-for-yield motives, we have long held a
more nuanced view. Rather than the absolute level of yields, the growing demand for
illiquid private debt investing has reflected two key drivers. The first is the smoother
returns and superior Sharpe ratios delivered by the private debt market. The second is
the volatile and often times mispriced liquidity premia in public markets. In our view, the
COVID crisis has likely strengthened these drivers. As shown in Exhibit 14, private debt
markets showcased their ability to deliver superior risk-adjusted returns. And as illiquid
as it is, the private debt asset class also posed fewer challenges to investors when it
came to assessing liquidity risk relative to public bond markets at the height of the
COVID shock.
Similarly, we also think the post-pandemic environment further reinforced two key
structural drivers of growth on the supply side. The first is the even higher entry barrier
in public markets, as evidenced by the material increase in the average deal size in the
HY and broadly syndicated leveraged loan markets. The second is the greater emphasis
on flexibility from corporate managements, which will also likely further boost capital
formation in private debt markets.
17 November 2021 10
Goldman Sachs
Exhibit 13: We expect private debt markets will further cement Exhibit 14: The private debt asset class has consistently delivered
their position as a distinct and scalable asset class superior volatility-adjusted returns vs. public markets
Annual total returns on HY bond and direct lending indices; the notional
on the vol-neutral HY index is reduced by matching its unconditional
return volatility with that of the Cliffwater Direct Lending Index
Investment Company, 1% Private Sector Pension Fund, 16% HY (Vol-neutral) CDLI 16%
Sovereign Wealth Fund, 1% 18%
Other, 6% 14% 14%
Government Agency, 2%
12% 12%
Fund of Funds Manager, 2% Foundation, 13%
10% 10%
Bank/Investment…
8% 8%
6% 6%
Asset Manager, 6%
4% 4%
Wealth Manager, 7% Public Pension Fund,
11% 2% 2%
Endowment Plan, 8%
0% 0%
Family Office, 11% -2% -2%
Insurance Company, 9% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Preqin, Goldman Sachs Global Investment Research Source: Bloomberg, Cliffwater, Goldman Sachs Global Investment Research
The continued growth of private debt markets and the expansion of their investor base
have recently reignited the debate over potential risks to financial stability. The lack of
regulatory oversight relative to the traditional bank lending sector, the heavy presence of
private equity sponsors, and excessive issuer-friendliness remain three of the most
encountered concerns. We continue to err on the benign side of the debate. Strong
investor demand has clearly fueled borrower-friendliness, as has been the case in public
markets. But unlike public markets, tighter controls by direct lenders do provide an
offset. Many direct lenders are the sole lender and often own the loan through its
maturity, which gives them more control over covenants, structure, and due diligence.
We also think the parallel that is often made between private debt vehicles, especially
direct lenders, and the shadow banking system is misguided. Direct loans are originated
by asset managers using capital raised from a broad range of (mostly unleveraged)
investors. Further, unlike banks, asset managers do not carry maturity or asset/liability
mismatches, and the vehicles through which the loans are marketed to investors
(private funds and BDCs) have reasonably low levels of leverage. All in all, this limits the
risk of a deleveraging shock in the financial system.
The performance of the asset class during the COVID crisis was consistent with this
benign view. Of course, private debt investors greatly benefitted for the unprecedented
policy support that was unleashed during the crisis. But we do take comfort from the
fact that the magnitude of the increase in defaults was in line with public markets. The
industry also held up well, with little evidence of distress among the investor base.
Lastly, concerns that the strong presence of financial sponsors in private debt markets
would fuel higher borrowing costs during periods of economic downturns proved largely
overstated. If anything, private ownership turned out to be an asset for borrowers.
ESG: Demand will remain (well) ahead of supply

Another theme that will continue to shape credit portfolios is ESG investing. In each of
the past several years, the ESG fixed income market has set consecutive records for
both supply and demand – and 2022 is unlikely to be an exception to this pattern. Assets
17 November 2021 11
Goldman Sachs
under management (AUM) in ESG mutual funds and ETFs have now reached $435
billion (Exhibit 15) – 3.5x the AUM as of 2019 and roughly one-quarter the size of the
Bloomberg US HY Index. We expect flows into ESG funds to remain supportive given
the well-telegraphed climate-related commitments from a wide range of investors,
including the “Financial Sector Commitment Letter,” Nordic and British pension funds,
and the EU Catalyst programme public/private investment scheme.
On the supply side, growth has been even more striking. This is consistent with our
long-standing view that strong demand from investors will continue to generate robust
ESG issuance from a wide range of corporate sectors and issuers. For example, 2021
has already shattered 2020’s records for ESG new issue activity in aggregate (including
green, social, sustainable and sustainability-linked bonds) in the USD and EUR markets
(Exhibit 16). And as the ESG primary market has continued to mature and grow, the mix
of supply has also evolved. While the market was heavily skewed towards green bonds
just a few years ago, other forms of ESG-related funding now contribute a meaningful
share, including social, sustainable and sustainability-linked debt. In fact, 2021 included
the inaugural sustainability-linked bond issues in the USD HY and EUR HY markets. We
expect the acceleration in this type of issuance to persist, in particular, as it provides
corporates with funding flexibility while also signaling a focus on ESG priorities. A wider
range of corporate issuers are driving these record-setting overall ESG primary market
volumes compared to a few years ago (Exhibit 17). We see scope for this to increase
further as well.
Exhibit 15: Investor demand continues to create its own supply in the ESG market
Assets under management in ESG mutual funds and ETFs
$bn
Mutual funds ETFs Total AUM
500
$435
450
400
$347
350
300
250
200
150 $124
100
$49 $57
50 $18 $20 $27
0
2014 2015 2016 2017 2018 2019 2020 2021
YTD
Source: EPFR, Goldman Sachs Global Investment Research
17 November 2021 12
Goldman Sachs
Exhibit 16: A new record-setting year for ESG-related issuance

ESG gross issuance for IG rated issuers in the USD (left panel) and EUR (right panel) markets
$bn % €bn %
100 Green 6 140 25

Green
90 Social Social
Sustainable 120
5 Sustainable
80 20
Sustainability-linked
Sustainability-linked
70 Primary market share (RHS) 100
4 Primary market share (RHS)
60 15
80
50 3
60
40 10
2
30 40
20 5
1 20
10
0 0 0 0
2014 2015 2016 2017 2018 2019 2020 2021 2014 2015 2016 2017 2018 2019 2020 2021
Source: Dealogic, Goldman Sachs Global Investment Research
Despite the increase in issuer diversification, investor demand continues to outweigh

supply, as evidenced by the persistent (though declining) ESG premium in the primary
market, i.e., a lower yield-at-issuance on average, relative to non-ESG bonds. This is
illustrated in Exhibit 18, which shows our estimates of the average ESG discount
available to issuers in the USD and EUR markets. While subject to some statistical
uncertainty, these estimates show that the USD market ESG premium is converging to
the EUR market’s but it remains sizeable, especially given the very low absolute levels
of yields.
In the secondary market, we have previously highlighted that there is little statistical
evidence that ESG bonds outperform or underperform non-ESG bonds in any
meaningful way. This pattern has remained consistent throughout 2021 in both the USD
and EUR IG markets on an aggregate basis as well as on an issuer- and
duration-matched level. A similar pattern emerges when analyzing the performance of
“ESG-heavy” capital structures compared to those with a lower share of ESG bonds
relative to total debt outstanding.
17 November 2021 13
Goldman Sachs
Exhibit 17: The ESG issuer base continues to grow, providing more Exhibit 18: Issuers are still capturing a discount in the cost of debt
diverse options to investors for ESG bonds, suggesting that demand continues to outpace
Number of unique tickers with at least one USD IG or EUR IG ESG bond supply
outstanding, by quarter Estimates of funding cost savings (in bp) to issuers of ESG bonds,
relative to non-ESG bonds; these estimates are obtained by regressing
the yield-at-issuance on a binary variable indicating its ESG-status at
issuance, as well as controls for seniority level, maturity, sector and
rating; to adjust for the time-varying macro backdrop, we further include
monthly fixed-effects
Count USD EUR Count ESG borrower discount

300 300
275 2021
250 250
225
200 200 2020
175
150 150
125
100 100 2016 - 2019
75
50 50 USD
25 Full Sample EUR
0 0
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
0 -5 -10 -15 -20 -25

2014 2015 2016 2017 2018 2019 2020 2021 bp
Source: Bloomberg, Goldman Sachs Global Investment Research Source: Bloomberg, Dealogic, Goldman Sachs Global Investment Research
Fundamentals: From balance sheet repair to shareholder returns

The trajectory of corporate balance sheet fundamentals has been a textbook example of
a V-shaped recovery. Going into the year, we expected credit quality would likely recoup
most of last year’s damage from the sudden stop in economic activity, as the
vaccine-led recovery and the ensuing boost to profitability would allow most companies
to “passively” deleverage their balance sheets. The pace and magnitude of the recovery
have both surprised us to the upside, suggesting the COVID shock left little to no
scarring effects on corporate bond issuers, including lower-rated ones. The combined
effect of strong revenue growth (Exhibit 19) and improving profitability caused a notable
decline in net leverage. This is illustrated in Exhibit 20, which plots the ratios of net debt
to EBITDA for the median non-financial IG and HY-rated corporations. Some of the
decline in the median HY leverage ratio reflects a positive survivorship bias – a
byproduct of last year’s wave of fallen angel downgrades and defaults (Exhibit 21). Still,
the fundamental message from this year was unequivocally positive.
From a capital management standpoint, 2021 was also a friendly year to bondholders,
with liquidity positions remaining close to record-high levels. As shown in Exhibit 22,
balance sheet liquidity positions are still the strongest they have been in two decades
among both IG and HY-rated issuers. The strength of balance sheet liquidity positions
has greatly contributed to the sharp downward repricing of event risk and likely explains
the striking lack of dispersion in returns, both across and within sectors. It has also
allowed investors and rating agencies to look past temporary business disruptions –
especially in sectors with outsized vulnerability to supply chain bottlenecks.
17 November 2021 14
Goldman Sachs
Exhibit 19: The reopening of the economy fueled a remarkable Exhibit 20: The combined effect of strong revenue growth and
rebound in revenue growth for both IG and HY-rated issuers improving profitability caused a notable decline in net leverage
Year-over-year revenue growth for the median IG and HY-rated Net-debt-to-EBITDA ratios for the median IG and HY-rated non-financial
non-financial corporations domiciled in North America corporations domiciled in North America
28% 28% Ratio Ratio

IG HY IG HY (RHS)
23% 23% 2.7 4.1
18% 18% 3.9
2.5
13% 13% 3.7
2.3
8% 8% 3.5
3% 3% 2.1 3.3
-2% -2% 1.9 3.1
-7% -7% 2.9
1.7
-12% -12% 2.7
1.5
-17% -17% 2.5
-22% -22% 1.3 2.3

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 99 00 01 01 02 03 04 05 06 07 08 09 10 11 12 12 13 14 15 16 17 18 19 20 21
Source: FactSet, Goldman Sachs Global Investment Research Source: FactSet, Goldman Sachs Global Investment Research
Exhibit 21: The post-pandemic survivorship bias in the HY bond market has been strong, as evidenced by
the trajectory of the weighted-average rating factor (WARF)
Weighted-average rating factor (WARF) in the USD HY bond market
2,850 HY WARF 2,850
2,750 2,750
2,720 = B rating
2,650 2,650
2,550 2,550
2,450 Lower WARF = higher credit quality 2,450
2,350 2,350
2,250 2,250
2,220 = B+ rating
2,150 2,150
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: iBoxx, Goldman Sachs Global Investment Research
17 November 2021 15
Goldman Sachs
Exhibit 22: Balance sheet liquidity positions remain impressive, among both IG and HY-rated issuers
Aggregate levels of cash, cash equivalents, and marketable securities on corporate balance sheets at each calendar year-end, and as of June 30,
2021
$bn Count $bn Count
IG cash balance HY cash balance
1,100 # of IG firms (RHS) 500 350 # of HY firms (RHS) 800
1,000
480 300 700
900
600
800 460 250
700 500
440 200
600
400
500
420 150
400 300
300 400 100

200
200
380 50 100
100
0 360 0 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Source: FactSet, Goldman Sachs Global Investment Research
In our view, the healthy growth backdrop in upcoming quarters, coupled with the strong
pricing power in the face of strong aggregate demand, leaves decent scope for more
passive deleveraging. But relative to this year, we think the tailwind from passive
deleveraging will likely be partially offset by a return to active forms of re-leveraging, as
managements’ mindset shifts away from balance sheet repair mode. Recent headlines
about breakups among many large IG-rated multinational companies highlight this
stronger focus on unlocking shareholder value.
One key question for investors is how and where will companies deploy the significant
amount of excess liquidity that has been accumulated over the past year and a half
(again, Exhibit 22). In our view, there is a case for structurally higher cash balances in the
near term. But we expect a large portion of the excess liquidity on corporate balance
sheets will ultimately be utilized. As we showed in recent research, the historical
evidence on corporate uses of cash flows as well as recent public commentary
(earnings calls, presentations) from the largest corporate borrowers in the USD IG and
HY market suggests the mindset of managements is poised to transition to a new
phase with reduced focus on balance sheet repair. In HY, we expect the capital
management focus to pivot towards business investment (organic, and via M&A), with
less focus on refinancing and debt repayment (which has dominated the past two
years). In IG, we expect a continued focus on shareholder returns and M&A – especially
in sectors such as Technology and Healthcare, where many of the largest borrowers
have ample scope to add debt while still maintaining IG ratings. The risk is that the
return to a shareholder-friendly posture materializes too quickly and too aggressively,
which would outweigh the benefits from passive de-leveraging and thus mark the start
of negative trend in credit quality.
Rating migrations and defaults: Still benign

The default backdrop has been remarkably benign this year, in both the US and Europe.
We see little reason to expect a negative shift in 2022, which is consistent with current
market pricing. Fundamentally, the record-high levels of cash on balance sheet coupled
17 November 2021 16
Goldman Sachs
with our expectation of still-robust growth next year should keep issuers’ incentives to
default quite low. We also take comfort from the strong positive survivorship bias in the
HY market, especially in the US. Our most recent update on zombie firms suggests
creative destruction has been alive and well despite the short duration of this cycle. We
forecast the 12-month issuer-weighted HY default rates in the US and Europe will stay
around current rock-bottom levels, settling at 1.9% and 2% by year-end 2022,
respectively (Exhibit 23). These low forecasts likely overstate the overall impact of
default on bond indices, as we expect the market value-weighted default rates will be
even lower than their issuer-weighted counterparts. On a notional basis, we expect a
meager $10 billion worth of bonds will default in the USD HY market vs. €1 billion in the
EUR market.
Exhibit 23: We forecast the 12-month issuer-weighted HY default rates in the US and Europe will stay
around current rock-bottom levels
16% 16%
US Europe Forecast
14% 14%
12% 12%
10% 10%
8% 8%
6% 6%
4% 4%
2% 2%
0% 0%
2000 2003 2006 2009 2012 2015 2018 2021
Source: Moody’s, Goldman Sachs Global Investment Research
We also remain sanguine on rating migrations, expecting rising stars will continue to
largely outpace fallen angels. In our view, the rating agencies will continue to
acknowledge the magnitude of the fundamental improvement of the past few quarters.
This should drive further momentum in upgrades even though managements’ focus on
balance sheet repair becomes less widespread. As has been the case in previous
cycles, we expect the 2020 wave of fallen angels will be followed by a gradual but
robust trend of positive momentum in rating migrations as the cycle continues to
mature. In the USD market, 2020´s record-high wave of fallen angels of over $230 billion
has been followed by $54 billion worth of bonds migrating back from HY to IG vs. $9.5
billion of fallen angels in 2021. For 2022 we expect this upward rating migration trend
will remain in place. We forecast $100 billion of rising stars in 2022 vs. $30 billion of
fallen angels, making a net positive migration from HY to IG of $70 billion (Exhibit 24,
left panel). In the EUR market, we forecast €17 billion of net rating migrations from HY
into IG next year, as €25 billion of rising stars (which will likely involve cross-currency
issuers) will be somewhat offset by €8 billion of fallen angels (again Exhibit 24, right
17 November 2021 17
Goldman Sachs
panel).
Exhibit 24: We expect rising stars will continue to outpace fallen angels in both the USD and EUR market
Annual notional amount of net rating migrations from HY to IG
$bn $bn €bn €bn
USD EUR
100 100 40 40
50 50 20 20
0 0 0 0
-50 -50 -20 -20
-100 -100 -40 -40
-150 -150 -60 -60
-200 -200 -80 -80

10 11 12 13 14 15 16 17 18 19 20 21 22E 10 11 12 13 14 15 16 17 18 19 20 21 22E
Supply technicals: Back to normal

After two exceptionally elevated years for USD IG and HY primary market activity, we
expect a return to a more normalized pattern for debt issuance in 2022, given the
magnitude of pre-funding, refinancing and liquidity raising already completed. For the
USD IG market, we forecast $1.3 trillion of gross supply next year. While this would
represent a steep decline vs. 2020 ($2.0 trillion) and a moderate deceleration compared
to 2021 ($1.5 trillion forecasted), it would still place 2022 in line with the average of the
2014-2019 period (Exhibit 25, left panel).
In our view, many of the largest IG-rated borrowers have ample scope to add debt (both
gross and net) while still maintaining IG ratings. Additionally, the debt maturity walls for
the USD IG market are somewhat more challenging, generally ranging between $550
and $650 billion for each of the next five years. With the cost of debt funding still
exceptionally low for IG corporates, we also see some scope for a continuation of the
opportunistic issuance mindset among this universe despite the elevated levels of cash
on IG corporates’ balance sheets. We forecast USD IG net issuance of $410 billion in
2022, down 18% from the $500 billion that 2021 will likely generate by year-end (Exhibit
26, left panel). In addition to an estimated $610 billion of scheduled maturities in the IG
market next year, we assume total redemptions (tenders and calls) of $350 billion, and
$70 billion of net rating migrations (from HY, into IG) next year.
For the USD HY market, we project $325 billion of gross issuance in 2022 (Exhibit 25,
right panel). This would represent a reprieve from the back-to-back records set in 2020
($426 billion) and 2021 ($450 billion forecasted). That said, our 2022 forecast
nonetheless ranks at the high end of the range of the past several years (excluding 2020
and 2021). Since nearly two-thirds of the gross issuance volumes over the past two
years have been earmarked for debt repayment or refinancing, USD HY maturity walls
are in a very manageable position while cash balances among HY-rated corporations
remain at record high levels (again Exhibit 22). But as we outlined recently, as HY
corporate management teams shift their capital management priorities towards
17 November 2021 18
Goldman Sachs
business investment (organic, and through M&A) and shareholder returns, they may
also require debt funding.
On a net basis, we expect quasi-flat supply in the USD HY market, at $5 billion – down a
staggering 90% from this year’s likely level (Exhibit 26, right panel). The key driver of this
material drop is the tailwind from net rating migrations ($70 billion) from HY to IG. When
combined with the $10 billion of defaulted bonds that we forecast, this should largely
offset the $85 billion of USD HY organic net issuance that we forecast. Given the
record-high level of cash on HY issuers’ balance sheets, the risk to this forecast is
skewed to the downside, which could cause the HY bond market to shrink next year –
as it did from 2017 to 2019.
We view a boom in debt-funded M&A as the key upside risk to these forecasts.
Announced M&A volumes continued to set new records in 3Q2021, and we expect this
momentum to persist into 2022, although likely at a more moderate pace. While the
funding mix for acquisitions has been quite friendly for bondholders, increased utilization
of debt would present an upside risk.
Exhibit 25: After two exceptionally elevated years for USD IG and HY supply, we expect a moderation in 2022
USD IG (left panel) and USD HY (right panel) historical annual gross issuance and forecasts
17 November 2021 19
Goldman Sachs
Exhibit 26: We forecast a moderate level of USD IG net supply next year, alongside a sharp decline in the USD HY market
USD IG (left panel) and USD HY (right panel) historical annual net issuance and 2022 forecast
Source: Bloomberg, Dealogic, Goldman Sachs Global Investment Research
In the EUR market, we also expect a decline in gross issuance for 2022: a moderate
deceleration for EUR IG and a more notable slowdown for EUR HY. In IG, we forecast
€525 billion of gross supply in 2022. While this would represent a lower issuance run
rate compared to the 2019-2021 period, it would slightly surpass the average range of
2014-2018 (Exhibit 27, left panel). In HY, we are calling for €90 billion of gross issuance in
2022 (Exhibit 27, right panel). This would represent a sharp decline from the
record-setting volumes of 2021 but would still leave EUR HY gross supply at the high
end of the historical range next year.
In both IG and HY, steep maturity walls will be mitigated by cash balances that remain at
or near record levels. Notably, in contrast to the record-setting pace of its USD IG peer,
new issue volumes in the EUR IG market over the last two years have not been
especially outsized relative to history. To us, this suggests that firms in the EUR market
have, in general, not engaged in aggressive pre-funding/refinancing of upcoming
maturities over the past two years. We forecast EUR IG net supply of €110 billion next
year, which would represent an approximate 10-15% decline vs. 2021’s likely total
(Exhibit 28, left panel). In addition to an estimated €350 billion of scheduled maturities,
we also assume redemptions (tenders and calls) of €85 billion – a level slightly ahead of
the average pace of €69 billion from 2014-2019. We also expect €17 billion of net rating
migrations from EUR HY into IG next year, as €25 billion of rising stars will be
somewhat offset by €8 billion of fallen angels.
In HY, we see a strong case for issuers to opportunistically target the maturity walls of
2025-2026 and increase their focus on proactive refinancing. That said, record levels of
cash on balance sheet are likely to keep refinancing needs lower relative to 2021. We
forecast EUR HY net supply of €15 billion in 2022, which would be down over 60% from
where we expect 2021 to finish (Exhibit 28, right panel). Net rating migrations of €17
billion (debt that will move from EUR HY, into EUR IG) will offset much of the €33 billion
we expect in EUR HY organic net issuance next year. We also expect €1 billion of
defaults to exit the EUR HY index.
17 November 2021 20
Goldman Sachs
Exhibit 27: We expect a moderate decline in EUR IG gross supply in 2022 and a more notable slowdown in EUR HY (from a record level)
EUR IG (left panel) and EUR HY (right panel) historical annual gross issuance and forecasts
Exhibit 28: And we expect a similar pattern for net supply: a moderate decline for EUR IG and a significant drop for EUR HY
EUR IG (left panel) and EUR HY (right panel) historical annual net issuance and 2022 forecast
Source: Bloomberg, Dealogic, Goldman Sachs Global Investment Research
Demand technicals: Incrementally weaker in the USD market, less so in EUR

This year’s robust new issue volumes have been met by equally robust demand. The
strength of the technical backdrop has been visible in both the primary and secondary
markets, as evidenced by the subdued levels of new issue concessions in the USD IG
market. For the year ahead, we think low yields globally, the continued flattening bias in
the US Treasury yield, and the benign backdrop in terms of net supply should result in a
healthy technical backdrop. But relative to this year, we expect foreign participation in
the USD market will weaken as opportunistic cross-currency investors start facing
higher USD funding and hedging costs in the second half of 2022 once the Fed starts its
hiking cycle. After what will likely be a record-high year for foreign inflows into the USD
market, we expect some normalization next year (Exhibit 29). Foreign credit portfolios
are to various degrees hedged against FX fluctuations, which likely explains the negative
correlation between hedging costs and foreign demand over the past few years. For
17 November 2021 21
Goldman Sachs
some FX crosses like the EUR and the JPY, rolling USD hedging costs will go up as the
Fed starts hiking while the ECB and BoJ remain on hold (Exhibit 30). All else equal, this
will reduce the attractiveness of the USD market as a source of yield pickup for foreign
investors.
Exhibit 29: After a record-setting 2021, foreign flows into the USD Exhibit 30: Rolling USD hedging costs are poised to increase as the
market will likely subside next year Fed starts to hike next year
$bn $bn % %
Rest of the year Jan-Sep EUR GBP JPY
140 140 3.5 3.5
3.0 3.0
90 90 2.5 2.5
2.0 2.0
40 40
1.5 1.5
-10 -10 1.0 1.0
0.5 0.5
-60 -60
0.0 0.0
-0.5 -0.5
-110 -110
-1.0 -1.0
-160 -160 -1.5 -1.5
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Federal Reserve Board, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
In the EUR market, we think demand technicals will likely remain as strong as they have
been in recent quarters. Key to this view is the market’s reliance on the ECB net
purchases. Since the start of 2020, the ECB’s corporate bond portfolio has grown by a
little less than €157 billion, owing to a large extent to net purchases conducted under
the CSPP. Over the same timeframe, the overall amount of net supply in the EUR IG
market (including net rating migrations) has amounted to €255 billion, on our estimates.
With a back-of-the-envelope calculation, these figures suggest the ECB’s net purchases
have absorbed a staggering 61% of the cumulative net supply since the start of 2020.
The strength of the ECB´s flow has been particularly impressive recently. On our
estimates, the ECB cumulative net purchases of €19 billion absorbed more than the
entirety of the EUR IG market’s net supply of €17 billion in the third quarter (Exhibit 31).
With the ECB likely to announce a bridge to the APP after the PEPP ends in March, we
think the technical tailwind from the ECB’s flow of purchases will remain a key
stabilizing force in the EUR market.
17 November 2021 22
Goldman Sachs
Exhibit 31: ECB net purchases in the third quarter have surpassed net issuance in the EUR IG market
Quarterly net issuance in the EUR IG market for eligible and non-eligible issuers vs. cumulative net purchases
under the CSPP and PEPP
€bn €bn
Net issuance of eligible issuers Net issuance of ineligible issuers
140 140
CSPP/PEPP net purchases
120 120
100 100
80 80
60 60
40 40
20 20
0 0
-20 -20
-40 -40
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2016 2017 2018 2019 2020 2021
Source: ECB, Bloomberg, Goldman Sachs Global Investment Research
Inflation: Low risk, high severity

The biggest risk to sentiment, particularly in fixed income markets, is that the current
combination of supply chain bottlenecks and accelerating wage growth persists much
longer than currently anticipated by most investors. One of the many takeaways of the
past few quarters has been that a return to the pre-pandemic “not too hot, not too cold”
macro environment is unlikely. This reflects many structural shifts in the post-pandemic
macro environment, including changes to monetary policy frameworks, more aggressive
fiscal policy, greater emphasis on investment in renewable energy, a slower recovery of
the labor force, and generally stronger aggregate demand given healthier household
balance sheets relative to the aftermath of the global financial crisis. Mainly for this
reason, our US economists expect core CPI to peak at about 6% and remain above 4%
by mid-2022 when Fed tapering is concluded (Exhibit 32). In this backdrop, any upside
surprise in inflation could cause investors to quickly price in a much faster timeline for
Fed hikes, which given current valuations would weigh heavily on risk assets. This is
particularly true for spread products where negative real yields essentially mean that
investors’ protection against any repricing of inflation risk is non-existent (Exhibit 33).
17 November 2021 23
Goldman Sachs
Exhibit 32: Our US economists expect core CPI to peak at about 6% and remain above 4% by mid-2022
% change, year ago % change, year ago
7 7
Core CPI
Core PCE
6 6
Last Core CPI Before the July FOMC Meeting
Last Core PCE Before the July FOMC Meeting

5 5
4 4
3 3
2 2
1 1
GS Forecast
0 0
2017 2018 2019 2020 2021 2022 2023
Source: Department of Labor, Department of Commerce, Goldman Sachs Global Investment Research
Exhibit 33: Negative real yields create unique vulnerabilities for fixed income investors
Real yields on the Bloomberg US Aggregate, USD IG and agency MBS indices
% %
US Aggregate Agency MBS IG
10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
02 03 04 05 06 07 08 09 10 11 12 13 13 14 15 16 17 18 19 20 21
Upside risk in inflation also reinforces many of our relative value views within corporate
credit markets, most notably our overweight allocation on the Energy sector, the greater
emphasis on pricing power as an ingredient to sector and issuer selection, and our
preference for floating rate over fixed rate structures. Within the broader fixed income
universe, we also think structured products have a strong embedded hedge against
inflation risk that further strengthens their value proposition. For example, the supply
chain challenges that have pushed up used vehicle and home prices have also led to
17 November 2021 24
Goldman Sachs
declines in loss rates across auto ABS and residential MBS. Similarly, persistent wage
inflation is a risk to corporate profits but would be credit positive for residential RMBS
and consumer ABS. Lastly, real assets such as single-family housing and commercial
real estate have the potential to act as hedges for inflation risks, as, historically, property
owners have been able to pass rising input costs through to rents.
Another related concern that is increasingly encountered among market participants is

the risk of stagflation, i.e., high inflation and slow growth. In our view, if stagflation is
defined as a combination of year-over-year inflation of at least 3% (as measured by PCE,
the Fed’s preferred measure) and real GDP growth of 50bp below the Congressional
Budget Office’s trend (CBO), then the bar is quite high. In fact, and as shown in Exhibit
34, there have only been very few periods over the last five decades where this
happened, all coinciding with recessions and most taking place in the 1970s and 1980s,
prior to the onset of the great moderation. As we have discussed in previous research,
and with the caveat that the structure and composition of corporate credit markets have
both experienced dramatic changes since the 1970s, the historical evidence suggests
that, when stagflation rears its head, credit investors quickly price in a recession, as
fears over tighter monetary policy weakens risk appetite. Another feature of the 1970s
and 1980s stagflation episodes was that investors faced a double whammy of wider
spreads and higher rates – a key vulnerability considering the lack of yield and spread
support in today’s corporate credit portfolios. As low as the odds of stagflation are, we
therefore think the severity of such an outcome would be quite damaging for corporate
credit. This is particularly the case in the USD IG market, where investors face a
combination of negative real yields, ultra-low nominal yields, tight spreads, and
two-decade highs in duration.
Exhibit 34: When stagflation rears its head, credit investors quickly price in a recession
bp bp
High Inflation, IG OAS HY OAS (RHS)
Low Growth (Stagflation)
550 1,800
500
1,600
450
1,400
400
1,200
350
300 1,000
250
800
200
600
150
400
100
50 200
74 76 78 80 83 85 87 89 92 94 96 98 01 03 05 07 10 12 14 16 19 21
17 November 2021 25
Goldman Sachs
Sector allocation: Look for pricing power, operational agility, and

reopening exposure; keep an eye on event risk
Exhibits 35 and 36 summarize our sector allocation recommendations in the USD IG and
HY markets. In addition to valuations, three pillars underpin our sector views for 2022: 1)
the degree of bondholder-friendliness in sector capital allocation priorities, as we expect
conservative capital management to be the exception, rather than the rule; 2) pricing
power, which determines the vulnerability to supply chain and inflationary headwinds;
and 3) exposure to the final leg of the re-opening as new therapeutic treatments are
discovered/approved and existing vaccines and boosters become more widely available.
Exhibit 35: In the IG market, our sector preferences exhibit a skew towards BBB-rated groups
USD IG sector allocation recommendations
Fundamentals / capital mgmt
Supply chain / inflation
Yield to Average Excess Return: Excess Return:

Re-opening exposure
Allocation OAS Market Value Index Weight

Sector Worst Maturity YTD 3-month Average rating
Event \ ratings risk
Recommendation (bp) ($bn) (%)

(%) (Yrs) (%) (%)
Valuation
USD IG 90 2.3 12.2 1.7 0.3 $6,848

Energy + + + + 110 2.5 12.4 4.2 0.9 $540 A3/BAA1 8%
Banking - Subordinated + + + + 106 2.4 9.6 1.5 0.2 $244 A3/BAA1 4%
Insurance (Life / Health / P&C) + + – + 93 2.5 14.6 2.1 0.4 $307 A3/BAA1 4%
Telecom (Wirelines) + + + 122 2.9 17.9 2.6 -0.2 $247 BAA1/BAA2 4%
REITS – 88 2.3 8.6 2.5 0.2 $203 BAA1/BAA2 3%
Aerospace & Defense + + + 98 2.5 13.6 2.8 0.8 $154 BAA1/BAA2 2%
Wireless + + 113 2.7 13.7 0.7 -0.3 $115 BAA2/BAA3 2%
Media & Entertainment Overweight + + + 103 2.6 14.5 1.9 0.3 $109 BAA1/BAA2 2%
Finance Cos + + + 117 2.3 5.3 4.4 1.1 $78 BAA2/BAA3 1%
Metals & Mining + + – 140 3.0 14.8 1.4 -0.3 $59 BAA1/BAA2 1%
Restaurants – + 85 2.4 14.1 1.4 0.2 $40 BAA1/BAA2 1%
Transportation Services – + + 87 2.5 15.0 1.7 0.1 $41 BAA1/BAA2 1%
Gaming + + – 193 3.2 5.5 1.3 -1.0 $17 BAA3/BAA3 0%
Airlines + + + 116 2.3 6.2 7.1 1.6 $22 A3/BAA1 0%
Lodging + + 109 2.3 6.3 3.4 0.9 $13 BAA3/BAA3 0%
Banking - Senior – + + + 70 1.8 6.7 0.5 0.0 $1,212 A2/A3 18%
Food & Beverage – – – 87 2.4 14.5 1.9 0.6 $248 A3/BAA1 4%
Retail – + – + 67 2.2 13.1 0.9 0.2 $233 A1/A2 3%
Automotive – + – 71 1.8 6.6 1.9 0.3 $117 A3/BAA1 2%
Cable & Satellite + – 128 3.0 18.6 1.1 -0.7 $145 BAA1/BAA2 2%
Diversified Manufacturing – 78 2.3 11.7 2.9 0.7 $150 A3/BAA1 2%
Neutral
Brokerage / Asset Mgrs / Exchanges – + 79 2.1 9.7 1.2 0.1 $85 A3/BAA1 1%
Construction Machinery – 42 1.6 8.1 0.8 0.1 $53 A2/A3 1%
Other Industrial – 81 2.7 35.4 5.2 0.4 $33 AA2/AA3 0%
Home Construction + – – 95 2.2 7.4 1.3 0.3 $12 BAA2/BAA3 0%
Building Materials + 94 2.4 12.1 2.6 0.4 $25 BAA1/BAA2 0%
Consumer Cyclical Services – + 82 2.2 9.9 1.4 0.6 $23 A3/BAA1 0%
Technology – – – – – 79 2.2 12.5 0.6 0.1 $685 A2/A3 10%
Utilities + – 98 2.6 15.5 1.8 0.6 $562 A3/BAA1 8%
Pharmaceuticals – – + – – 76 2.3 13.7 1.1 0.2 $362 A2/A3 5%
Healthcare – – + – 87 2.4 15.5 2.7 0.5 $307 A3/BAA1 4%
Railroads + + 92 2.6 21.6 2.0 1.0 $100 A3/BAA1 1%
Chemicals + 94 2.5 14.6 2.9 0.3 $97 BAA1/BAA2 1%
Underweight
Tobacco + – – 146 3.0 13.7 0.9 0.1 $74 BAA1/BAA2 1%
Consumer Products – – – 53 2.0 10.4 1.2 0.3 $53 A1/A2 1%
Paper + – 123 2.7 11.1 2.6 0.3 $31 BAA2/BAA3 0%
Environmental – 74 2.2 11.8 1.0 0.0 $18 BAA1/BAA2 0%
Supermarkets + – – 98 2.6 15.1 2.1 0.9 $13 BAA2/BAA2 0%
Packaging – 84 2.2 7.3 1.9 0.3 $8 BAA2/BAA3 0%
Note: As of November 15, 2021.
17 November 2021 26
Goldman Sachs
Exhibit 36: In the USD HY market, we prefer sectors with bondholder-friendly capital management, as well as those that will benefit from
potential new COVID treatments
USD HY sector allocation recommendations
Supply chain / inflation

Fundamentals / capital
Re-opening exposure
Event / ratings risk

Yield to Average Excess Return:
Allocation OAS Market Value Index Weight
Sector Worst Maturity YTD Average rating
Recommendation (bp) ($bn) (%)
(%) (Yrs) (%)
Valuation
mgmt
USD HY 291 4.3 6.6 6.1 $1,656
Energy + + + + 339 4.9 7.6 14.5 $213 BA3/B1 13%
Gaming + + – 297 4.1 5.2 3.6 $65 B1/B2 4%
Media & Entertainment + – + + 338 4.9 6.2 4.3 $69 B1/B2 4%
Wirelines + + + 325 4.7 7.0 2.6 $47 BA3/B1 3%
Leisure + + 316 4.4 4.9 7.5 $44 B2/B3 3%
Finance Companies + + + + 344 4.7 5.1 5.1 $43 BA3/B1 3%
Insurance (Life / P&C / Health)
Overweight
– + + + 215 3.7 7.5 4.3 $39 BA3/B1 2%
Airlines – + 264 3.8 4.8 12.4 $28 BA2/BA3 2%
Aerospace & Defense + + + 313 4.4 5.1 7.7 $36 B2/B3 2%
Restaurants – + 275 3.7 6.6 4.0 $19 B1/B2 1%
Transportation Services + + + 387 5.1 5.3 7.0 $10 B1/B2 1%
Banking – + + + 175 2.9 5.6 4.5 $24 BA1/BA2 1%
Other Financial + + + 319 4.6 5.6 5.4 $18 BA3/B1 1%
Brokerage / Asset Mgrs / Exchanges + + + 311 4.9 7.2 5.3 $12 B1/B2 1%
Cable & Satellite + – + – 368 5.2 6.7 2.1 $97 BA3/B1 6%
Automotive – + – 216 3.3 6.2 6.6 $84 BA2/BA3 5%
Food & Beverage – + – + 203 3.6 11.1 7.3 $55 BA2/BA3 3%
Metals & Mining – – + – 268 4.2 7.1 6.9 $42 BA3/B1 3%
Pharmaceuticals + – + 392 5.5 6.1 0.4 $38 B1/B2 2%
Building Materials Neutral – – 286 4.5 6.8 4.2 $26 B1/B2 2%
Construction Machinery – – 258 4.1 6.7 4.9 $14 BA3/B1 1%
Diversified Manufacturing – – 272 4.0 5.6 4.2 $20 B1/B2 1%
Home Construction – + – + 222 3.6 5.8 4.8 $19 BA3/B1 1%
Other Industrial + – 365 5.1 5.5 7.6 $20 B1/B2 1%
Lodging – + 224 3.7 6.8 4.5 $13 BA3/B1 1%
Technology – – – – 258 4.1 6.3 4.3 $102 BA3/B1 6%
Healthcare – + – 266 4.1 6.2 4.7 $94 B1/B2 6%
Wireless – + + 196 3.3 6.7 2.9 $56 BA2/BA3 3%
Retailers + – – + – 298 4.5 7.3 8.0 $57 BA3/B1 3%
Consumer Cyclical Services + 320 4.7 5.9 4.3 $52 B1/B2 3%
Utilities – + 265 4.2 8.2 3.0 $45 BA2/BA3 3%
Packaging – + – 272 4.0 5.1 3.1 $34 B1/B2 2%
REITS Underweight – 257 3.9 5.4 5.8 $29 BA2/BA3 2%
Chemicals + + – 335 4.8 6.3 5.1 $35 B1/B2 2%
Consumer Products – – – – – 253 4.0 7.4 4.9 $27 BA3/B1 2%
Supermarkets – – – 200 3.4 5.6 4.4 $9 BA3/B1 1%
Environmental – 230 3.7 5.6 4.1 $9 B1/B2 1%
Paper + – 307 4.6 6.9 5.8 $9 BA3/B1 1%
Tobacco + – – 485 6.7 6.0 2.7 $2 B1/B2 0%
Railroads – 286 4.5 5.6 4.1 $1 CAA1/CAA1 0%
Growth and re-opening exposure worked well in 2021

Heading into 2021, our sector allocation recommendations in the USD IG and HY
markets favored groups with exposure to cyclical upside and re-opening momentum
(vaccine sensitivity). By contrast, we recommended underweight allocations to
defensive and cash-rich sectors, which were unlikely to benefit as much from the
economic recovery and where debt capacity could be used for M&A or shareholder
returns. In the USD HY market, we took a more nuanced approach to the re-opening
theme in April of 2021 and again in July 2021, eventually dropping most of the travel and
leisure exposed groups to neutral (from overweight). This reflected a combination of
constrained valuations and the risk posed by new virus variants, considering the weaker
fundamentals of the HY universe (relative to its IG peer group). More recently, we also
updated our sector allocations to reflect supply chain related issues (upgrading Telecom,
downgrading Autos), as well as other potential regulatory developments in Gaming.
Cyclical and re-opening sectors have generated strong performance on a year-to-date,

excess return basis across both markets (again, Exhibits 11 and 12). For example,
Energy, Airlines, Aerospace & Defense, and Autos outperformed their respective IG and
HY indices – some by a very wide margin. Retailers, Leisure, Metals and Mining, and
17 November 2021 27
Goldman Sachs
Transportation Services (which includes Auto Rentals), also did well in the HY market.
And in IG, Finance Companies, Lodging, Chemicals, Diversified Manufacturing, and
Building Materials outperformed. That said, some defensive sectors also generated
strong returns on a year-to-date basis, such as Telecom (Wirelines) and Healthcare in the
IG market and Food & Beverage in HY.
For 2022, a more nuanced approach is warranted

With the fastest pace of the recovery now behind us and a more challenging
growth/inflation mix in hand, our approach to sector selection for 2022 is more nuanced.
Our recommendations are underpinned by three key considerations: 1) the degree of
bondholder-friendliness in sector capital allocation priorities; 2) vulnerability to supply
chain disruptions and persistent inflationary headwinds; and 3) exposure to re-opening
sensitivity as potential new therapeutic treatments are discovered/approved and existing
vaccines and boosters become more widely available. More broadly, with starting
valuations tight across the board (Exhibits 37 and 38), we believe the backdrop next year
will be supportive of an increase in the dispersion of corporate bond returns (from their
current, very low levels), paving the way for credit selection as a driver of
outperformance. Our views for 2022 are less about capturing opportunities for absolute
spread compression and are instead geared towards identifying opportunities for relative
outperformance as the “rising tide lifts all boats” backdrop will no longer apply.
17 November 2021 28
Goldman Sachs
Exhibit 37: HY sector valuations have continued to compress since Exhibit 38: …and a similar pattern is evident in IG
the first Phase 3 vaccine news in November of 2020, especially in OAS ratio of sectors to the broader IG index
re-opening and Natural Resources sectors…
OAS ratio of sectors to the broader HY index
OAS ratio: HY sector vs. Index OAS ratio: IG sector vs. Index
Pre- Pre-
Pfizer Ph 3 Pfizer Ph 3
Delta COVID Delta COVID
HY Sector Today YE2020 Vaccine IG Sector Today YE2020 Vaccine
Variant spread Variant spread
Data Data
tights tights
11.12.2021 7.1.2021 12.31.2020 11.9.2020 2.18.2020 11.12.2021 7.1.2021 12.31.2020 11.9.2020 2.18.2020
Pharmaceuticals 1.35 1.30 0.83 0.68 0.95 Gaming 2.17 1.64 1.92 2.28 1.42
Transportation Services 1.35 1.50 2.02 1.83 1.42 Tobacco 1.64 1.62 1.36 1.26 1.42
Cable & Satellite 1.27 1.09 0.93 0.80 0.75 Metals & Mining 1.58 1.47 1.39 1.41 1.53
Finance Companies 1.19 1.27 1.15 1.16 0.89 Cable & Satellite 1.43 1.39 1.28 1.14 1.28
Energy 1.16 1.26 1.49 1.73 2.22 Paper 1.39 1.35 1.40 1.31 1.43
Media & Entertainment 1.16 1.17 1.12 1.12 0.83 Wirelines 1.36 1.34 1.38 1.22 1.28
Wirelines 1.13 1.16 0.95 0.90 1.77 Finance Companies 1.31 1.33 1.56 2.18 1.22
Chemicals 1.11 1.02 0.99 0.86 0.92 Airlines 1.30 1.61 2.62 3.08 1.02
Consumer Cyc Services 1.10 1.19 0.96 1.02 1.03 Wireless 1.24 1.20 1.11 1.07 1.14
Aerospace & Defense 1.10 1.18 1.27 1.43 0.80 Energy 1.22 1.26 1.43 1.59 1.43
Leisure 1.08 1.20 1.25 1.37 1.03 Lodging 1.21 1.38 1.60 1.97 0.78
Paper 1.07 1.09 0.96 0.88 1.30 Media & Entertainment 1.14 1.17 1.10 1.08 1.06
Brokerage Asset Mgrs 1.07 1.29 1.12 1.09 0.99 Aerospace & Defense 1.10 1.16 1.24 1.35 0.84
Retailers 1.03 1.08 1.08 1.07 1.34 Utility 1.10 1.16 1.10 1.09 1.03
Gaming 1.03 0.95 0.92 0.95 0.64 Supermarkets 1.10 1.17 1.10 1.02 1.36
Building Materials 1.01 1.06 0.89 0.74 0.72 Home Construction 1.07 1.08 1.02 0.66 0.62
Railroads 0.99 1.13 0.97 1.09 0.68 Chemicals 1.06 1.08 1.13 1.11 1.29
Metals & Mining 0.94 1.00 1.07 1.09 1.10 Insurance 1.05 1.07 1.09 1.05 1.09
Packaging 0.94 0.94 0.79 0.66 0.61 Building Materials 1.03 1.11 1.15 1.12 1.21
Airlines 0.92 1.15 1.58 2.08 1.11 Railroads 1.03 1.09 1.02 0.98 1.04
Diversified Manufacturing 0.92 0.88 0.94 0.91 1.24 REITS 0.99 1.01 1.11 1.23 0.97
Utility 0.91 0.98 0.76 0.72 0.72 Healthcare 0.97 1.02 1.04 1.01 1.07
Healthcare 0.91 0.92 0.90 0.94 0.94 Transportation Services 0.96 0.95 0.91 0.87 1.12
Restaurants 0.90 0.86 0.87 0.83 0.54 Food & Beverage 0.96 0.99 0.96 0.90 0.98
Construction Machinery 0.90 0.98 0.89 0.90 0.78 Restaurants 0.94 0.95 0.91 0.84 0.97
Consumer Products 0.89 0.95 0.61 0.72 0.67 Packaging 0.93 1.04 1.13 1.13 1.37
REITS 0.88 0.95 1.05 1.10 0.79 Consumer Cyc Services 0.91 0.99 0.73 0.73 0.83
Technology 0.87 0.84 0.87 0.72 0.62 Technology 0.88 0.83 0.78 0.76 0.81
Environmental 0.79 0.86 0.83 0.84 0.67 Brokerage Asset Mgrs 0.87 0.84 0.82 0.84 0.85
Home Construction 0.78 0.87 0.82 0.66 0.63 Diversified Manufacturing 0.86 0.90 1.01 1.02 0.94
Lodging 0.76 0.88 0.85 0.89 0.62 Pharmaceuticals 0.84 0.82 0.80 0.76 0.83
Automotive 0.75 0.84 0.84 0.65 0.71 Banking 0.84 0.81 0.75 0.75 0.77
Insurance 0.73 0.55 0.63 0.61 0.61 Environmental 0.82 0.78 0.79 0.72 0.74
Food & Beverage 0.71 0.73 0.70 0.66 0.69 Automotive 0.79 0.80 0.87 0.92 1.34
Wireless 0.68 0.58 0.56 0.52 0.31 Retailers 0.74 0.76 0.74 0.73 0.81
Supermarkets 0.67 0.77 0.81 0.70 1.11 Consumer Products 0.59 0.57 0.61 0.58 0.67
Banking 0.60 0.70 0.62 0.61 0.52 Construction Machinery 0.46 0.42 0.48 0.48 0.53
Bondholder-friendly capital management is likely to be the exception, rather than the

rule
As we recently highlighted, we expect the broad focus on balance sheet improvement
and liquidity raising – which has been in place for the past year and a half – will likely
fade as business investment, M&A and shareholder returns are re-prioritized. This shift
will be especially notable in the HY market, which was much more proactive in debt
paydown and refinancing in 2020 and 2021, relative to its IG peer. As a result, we view a
commitment to deleveraging as a strong positive when considering our sector
allocations for 2022, especially if there is a pathway for upward ratings momentum (into
IG, for example). Within Natural Resources, we have a preference for HY Energy
(overweight) vs. HY Metals & Mining (downgrading to neutral, from overweight).
While capital management priorities and event risk in Energy continue to skew positively
for bondholders, in Metals and Mining, the capital allocation backdrop has recently
shifted more in favor of shareholders and concerns regarding slowing demand from
China have increased. We are also upgrading HY Food & Beverage to neutral (from
17 November 2021 29
Goldman Sachs
underweight) as the pathway to IG ratings remains open for some of the largest
issuers in this heavily concentrated sector, as pricing power has kept cash flow strong
despite inflationary pressures. This positive is offset, to some extent, by very tight
valuations. An expectation for conservative capital management (due to regulatory
oversight) is a key driver of our continued overweight recommendation to HY Banks
and IG Banks – Subordinated. We are downgrading the IG Banks – Senior sector to
neutral (from overweight), purely driven by valuation. We expect similar conservatism
from the IG and HY Insurance sectors (upgrading to overweight from neutral),
which will also benefit from the gradual rise in rates our strategists expect.
Away from Financials in the IG market, scope for aggressive debt reduction is more
limited, based on our review of the capital management commentary of many of the
largest issuers. Nevertheless, IG Energy (overweight) and IG Food & Beverage
(upgrading to neutral, from underweight) did rank among the more
bondholder-friendly sectors in our review of capital management commentary, in
addition to IG Aerospace & Defense (upgrading to overweight, from neutral). We
remain cautious of cash-rich IG sectors with ample debt capacity and an appetite for
shareholder returns and/or M&A, such as IG Pharmaceuticals (underweight) and IG
Technology (underweight).
Lean into sectors that have the ability to manage (or avoid) supply chain headwinds
Our economists expect the inflationary pressures on durable goods and wages to abate
only gradually and partially next year. As a result, constraints posed by the supply chain
are also key considerations for our sector allocation framework. In HY, we continue to
recommend an underweight allocation to HY Consumer Products, these headwinds
could translate into weaker sales and margins, which may result in delayed IG rating
upgrades. Margin pressures and rich valuation also drive our underweight allocation to
IG Consumer Products. We recommend an underweight allocation to HY Retail,
which is especially vulnerable to a potential lack of inventory ahead of the important
holiday season. Given a different sector mix of IG Retail – which is more focused on
home improvement and mass merchant, and less focused on department stores and
specialty retail – we recommend a neutral allocation. Supply chain constraints are also
one of the drivers of our continued underweight allocation to HY Technology (in
addition to concerns about a product cycle peak and negative event risk for
bondholders). For homebuilders, evidence is emerging that supply chain bottlenecks
are beginning to pressure margins – a pattern that is likely to persist well into 2022.
While the housing market is expected to remain strong next year, the combination of
this risk and rich valuations cause us to downgrade IG and HY Home Construction to
neutral (from overweight).
Autos have encountered multiple pressures to their business, including higher

commodity input costs and lower sales due to chip shortages and constrained inventory.
While some rating agencies believe the Auto industry is unlikely to return to
pre-pandemic credit metrics in 2022 as the chip shortage extends (possibly into 2023),
we believe the worst of the pressures are beginning to ease and are upgrading Autos
to neutral (from underweight) in the IG and HY market. On the more positive side,
IG and HY Banks and Finance Companies (overweight) are less impacted by supply
17 November 2021 30
Goldman Sachs
chain disruptions – another supportive factor for our overweight recommendations (in
addition to conservative capital management). A similar backdrop is in place for Telco,
Media and Cable, which has, to date, only modest (second-order) impacts from supply
chain constraints. Within HY, we favor Wirelines and Media (both overweight). Our
underweight allocation to HY Wireless is driven primarily by valuation. In the IG
market, we recommend overweight allocations to Telecom (Wirelines), Wireless and
Media & Entertainment. We are downgrading IG and HY Cable/Satellite to neutral
(from overweight) to reflect intensifying competitive pressures.
With more medical interventions now available, there is scope for the final leg of the
re-opening theme to gain momentum
New antiviral drugs from Merck and Pfizer – if approved and broadly distributed – have
the potential to cut the risk of severe COVID outcomes even further, alongside
vaccinations and boosters. Our economists expect the GDP-weighted global protection
rate against infections and hospitalizations to rise to 85% by year-end 2022 (from 70%,
currently). This is likely to provide a tailwind behind many of the travel and leisure
sectors exposed to the final leg of the re-opening. As a result, for next year we are
recommending an overweight allocation to the re-opening sectors in both the IG
and HY markets, including Airlines, Aerospace & Defense, Leisure, Lodging,
Gaming, Restaurants, and Transportation Services. In the vast majority of cases,
these sectors’ spreads are still wide to their pre-pandemic levels. We see scope for
compression as these businesses continue to return to a more normalized operating
condition.
17 November 2021 31
Goldman Sachs
Relative value views: 10 relative value themes for a market that barely
offers any premium
1. Higher carry but higher risks: Neutral on IG vs. agency MBS

IG corporate bonds solidly outperformed agency MBS in the sixteen months following
the Federal Reserve’s intervention into the corporate bond market in late March 2020.
But as can be seen in Exhibit 39, there has been little differentiation in relative
performance over the last few months. We expect this pattern will likely persist, going
forward, and recommend a neutral allocation between the two markets (which together
compose roughly half of the Bloomberg US Aggregate index).
This neutral view reflects the lack of a clear catalyst for outperformance in either
direction. The carry differential between the IG corporate bond and agency MBS
markets is no longer high enough to drive outperformance (Exhibit 40), particularly given
the forward path for spreads that we envisioned as well as the IG corporate bond
market’s much longer duration vs. agency MBS (roughly 9 years vs. less than 4 years for
agency MBS). As for the agency MBS market, we acknowledge a number of headwinds
that limit the scope for outperformance on a risk adjusted basis. These include the
tapering of the Federal Reserve’s MBS purchase program, our expectation of continued
strength in net issuance fueled by strong house price growth, and a likely large increase
in the agency conforming loan limits, a move that will exacerbate mortgage convexity
risks. But we think the risk of material widening is still quite low given the prospects of
robust bank demand for agency MBS. Should concerns over the durability of the cycle
or the risk of a policy mistake by the Fed emerge and weigh on risk sentiment, we
would expect the agency MBS market would outperform in relative terms. But at the
current juncture, we think these risks are still sufficiently low to warrant a neutral
allocation.
Exhibit 39: IG corporate bonds are no longer outperforming agency Exhibit 40: The spread differential between IG corporate bonds and
MBS agency MBS has narrowed
Cumulative excess return, IG corporate bonds vs. levered agency MBS IG corporate bond minus agency MBS option adjusted spreads to
portfolio Treasuries
% % bp bp
IG - Levered MBS excess return IG - MBS OAS
4.0 4.0 325 325
300 300
3.5 3.5
275 275
3.0 3.0 250 250
2.5 2.5 225 225
IG Tightening
IG 200 Vs. MBS 200
2.0 Outperforming 2.0
175 175
1.5 Agency MBS 1.5 150 150
1.0 1.0 125 125
100 100
0.5 0.5
75 75
0.0 0.0 50 50
-0.5 -0.5 25 25
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 2014 2015 2016 2017 2018 2019 2020 2021
Note: Leverage ratio for agency MBS leg chosen to match lagging volatility of the IG corporate Source: Bloomberg, Goldman Sachs Global Investment Research
bond index.
17 November 2021 32
Goldman Sachs
2. Overweight EUR vs. USD spreads as the Fed/ECB policy gap becomes more visible
The relative performance of the USD and EUR corporate credit markets has exhibited
little differentiation in 2021 (Exhibit 41). In our view, the risk of a material deviation
remains remote, given the continued improvement in balance sheet fundamentals, the
stage of the business cycle, and still-strong search-for-yield motives. But despite equally
expensive valuations, we see scope for additional premia to rebuild in USD spreads,
going forward.
Three ingredients underpin our preference for EUR spreads. The first is the more patient
stance of the ECB relative to the Fed, and the ensuing tailwind to demand technicals, as
we discussed above. The second is our expectation of a more supportive
growth/inflation mix in the Euro area in 2022. Despite a somewhat underwhelming
growth trajectory recently, the case for European outperformance vs. the US remains
firm. Aside from a larger output gap, the stance of fiscal policy will also be more
supportive in the Euro area. Our economists expect that Recovery Fund disbursements
will begin next year, which, coupled with a likely pickup in public spending in Germany,
should result in a sizeable boost to growth. By contrast, fiscal support will weaken in the
US, even if the reconciliation package is passed largely as our economists expect.
Reduced fiscal support will add to Fed tightening as an additional drag on growth. The
third is the higher odds that a large portion of the material amount of excess cash on
corporate balance sheets will ultimately be returned to shareholders in the US – a
negative from a credit quality standpoint.
To be clear, our preference for the EUR market is a view on spreads. For cross-currency
yield buyers, we think the value proposition of the USD market is stronger. By our
estimates, the notional outstanding of issuer and maturity-matched USD bonds yielding
more than their EUR peers remains near its record-high level while the average yield
pickup also remains materially higher than pre-pandemic levels.
17 November 2021 33
Goldman Sachs
Exhibit 41: The relative performance of the USD and EUR corporate credit markets has exhibited little
differentiation in 2021
5-year EUR/USD IG spread differential
bp bp
5yr USD/EUR IG spread differential
-15 -15
-20 -20
-25 -25
-30 -30
-35 -35
-40 -40
-45 -45
Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21
3. Harvest the cross-over premium: Overweight BBs vs. BBBs

For rating-unconstrained investors, we think the premium embedded in BB-rated bonds
is more attractive than its BBB counterpart. For roughly the same level of market risk,
BB-rated bonds have been able to deliver superior excess returns over the last few
years. The “risk convergence” between BBs and BBBs in the USD market can be seen
across a variety of measures. Two prime examples of which are the exponentially
weighted standard deviation of excess returns and duration-times-spread (DTS) plotted
in Exhibits 42 and 43, respectively. However, despite this risk convergence, Exhibit 44
shows that a beta-adjusted and rates-hedged long-short BB vs. BBB strategy has
consistently outperformed over the last three decades. In other words, it generally takes
a large drawdown for BB-rated bonds to underperform on a risk-adjusted basis, and
barring such a scenario there appears to be an excess risk premium embedded in BB
spreads.
Beyond the higher default risk of BBs (which, all else equal, drives spreads wider) and
the longer duration of the BBBs (which, all else equal, drives volatility higher), the driver
of this pattern is likely rooted in the investor segmentation between these two markets.
In particular, unlike the IG investor base which reaches for yield by bidding up BBB-rated
bonds, HY investors have access to higher carry instruments in the lower end of the
ratings spectrum. In our view, it is the combination of these two forces that fuels this
harvestable excess premium. Given the low odds that this cycle inflects in 2022, and
the positive momentum in rising stars that we expect, we think investors with
“cross-over” mandates should use their comparative flexibility going into next year to
position themselves accordingly to capture this “cross-over” premium.
17 November 2021 34
Goldman Sachs
Exhibit 42: The standard deviations of BB and BBB excess returns Exhibit 43: … along with their duration-times-spread metrics
have been converging… Duration-times-spread (DTS) using index-level data
Annualized exponentially-weighted standard deviations are calculated
using a rolling 24-month window and a decay factor of 0.94
25% BBB BB 25% DTS BBB BB DTS

70 70
20% 20% 60 60
50 50
15% 15%
40 40
10% 10% 30 30
20 20
5% 5%
10 10
0% 0% 0 0
90 92 94 96 98 00 02 03 05 07 09 11 13 15 17 19 21 95 97 98 00 01 03 04 06 07 09 10 12 13 15 16 18 19 21
Exhibit 44: On an adjusted-basis, BBs consistently outperform BBBs in the USD market
Annual returns from a long-short BB vs. BBB (beta-adjusted and rates-hedged) strategy. 2021 returns are year do
date
6% 6%
4% 4%
2% 2%
0% 0%
-2% -2%
-4% -4%
-6% -6%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
YTD
4. … but stay overweight BBBs within the USD IG market

As mentioned earlier, given tight spreads, opportunities to capture incremental spread
will be all the more important for IG-constrained investors. Mainly for this reason, we
continue to recommend an overweight on BBB-rated bonds (vs. their higher-rated peers)
– a view that we have held since April 2020 and one that is also captured in our sector
allocation recommendations. While we acknowledge that valuations have compressed
meaningfully – as evidenced by the BBB-A OAS differential, which sits at multi-year
tights on an absolute basis (Exhibit 45) – we think investors’ search-for-yield motives will
remain strong, against a backdrop of tight spreads and our US economists’ view of
17 November 2021 35
Goldman Sachs
still-solid (albeit decelerating) growth. The duration of the BBB and A-rated indices is also
roughly similar (8.4 years for the A bucket vs. 8.7 for the BBB bucket), making the
additional spread pickup from BBBs even more attractive. We also continue to believe
that BBB issuers have an incentive to behave more conservatively from a capital
management perspective in order to preserve their IG-ratings. By contrast, their
higher-rated peers have a larger ratings cushion (well above the HY cut-off) and ample
debt capacity for acquisitions and shareholder returns.
Exhibit 45: We view the spread pickup offered by BBB-rated bonds as favorable, especially given our
expectation for more bondholder-friendly capital management from this lower-rated IG cohort
bp bp
BBB - A spread differential (RHS) BBB A
500 180
450 160
400
140
350
120
300
100
250
80
200
60
150
40
100
50 20
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
5. Until valuations reset, stay underweight CCC vs. overweight on B/BB

As mentioned earlier, CCCs are the one exception to our down-in-quality stance across
corporate credit, driven primarily by rich valuations. Heading into 2022, we recommend
an underweight allocation to the CCC bucket and overweight allocations to the BBs and
B buckets combined.
With the spread differential between CCC-rated bonds and their higher rated peers at
historically tight levels (again, Exhibit 5), we struggle to see a strong case for further
compression in 2022, especially given the negative signal from our Credit Risk Premium
estimates (which incorporate substantially lower cumulative CCC loss rate forecasts
than historical averages; again, Exhibit 6). This leaves risk-reward negatively skewed at
the CCC index level while increasing the importance of issuer and bond selection within
that cohort. As shown in Exhibit 46, CCCs typically outperform their higher rated peers
in the years immediately following sharp downturns (such as the commodity-led
weakness of 2015) or formal recessions – a backdrop that does not apply for 2022 given
our economists’ forecasts for still-solid growth. Additionally, we also favor the BB and B
buckets, as they provide large exposure to many of the sectors we have identified as (1)
bondholder-friendly and/or (2) poised for upward ratings momentum. These include
17 November 2021 36
Goldman Sachs
Energy, Food & Beverage, and Banks (Exhibit 47). And while the CCC bucket offers
substantial exposure to many of the re-opening sectors that we like, the BB/B weights
in these sectors are still sizable enough to benefit from the ongoing progress we expect
throughout 2022.
Exhibit 46: Outside of years immediately following sharp downturns or formal recessions, a strategy to be
overweight the BB and B buckets vs. their CCC counterpart performs well
Long-short annual excess returns of BB and B rated bonds vs CCC rated bonds
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10%
-15% -15%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
YTD
17 November 2021 37
Goldman Sachs
Exhibit 47: The B and BB indices offer significant exposure to Energy, Food & Beverage, Banks – sectors
with bondholder-friendly capital management and/or positive rating momentum
Sector weights (by market value) within the Bloomberg B, BB and CCC USD Corporate indices
Sector B BB CCC
Leisure / Lodging / Gaming 10.75 3.98 13.08

Healthcare / Pharma 12.73 4.26 10.11
Bldg Mat / Construction / Manuf / Industrials 5.83 3.26 8.40
Media Entertainment 5.03 2.87 7.22
Energy 10.27 16.62 6.79
Airlines / Aero & Def 3.67 3.32 6.32
Technology 6.16 6.36 6.32
Paper / Packaging / Chemicals 6.42 3.27 6.12
Consumer Cyc Services 4.15 2.11 4.73
Retailers 3.11 3.21 4.56
Insurance 0.58 3.08 4.35
Wirelines 2.57 2.68 4.19
Automotive 1.83 7.24 3.59
Cable Satellite 5.87 5.91 2.29
Food & Bev / Tobacco / Supermarkets 3.83 5.29 2.22
Banking / Fins 3.91 7.46 2.03
Restaurants 1.25 0.94 1.80
Wireless 2.09 5.06 1.53
Consumer Products 1.78 1.60 1.30
Metals and Mining 2.72 2.70 1.19
Utilities & Environmental 1.76 4.79 0.69
Transportation Services 0.92 0.40 0.48
Home Construction 1.27 1.27 0.35
Railroads 0.00 0.00 0.34
REITs 1.49 2.31 0.00
6. Retaining our structural bullish view on 30s vs. 10s in the USD market
As discussed above, we think the structural drivers for long duration corporate bond
demand will likely remain in place in 2022, which leaves us comfortable with our
preference for 30-year over 10-year spreads. Beyond the risk of supply-related technical
pressure on 30-year bonds (especially if the appetite for large debt-funded M&A deals
returns) or a sharp increase in rates volatility, there are two frequently encountered
pushbacks to our overweight allocation recommendation on 30-year spreads. The first is
the relative valuations of 30-year vs. 10-year spreads, which some view as stretched by
historical norms. The second is the prospect of additional flattening in the back-end of
the Treasury yield curve, which many market participants think limit the scope for further
flattening of corporate bond spread curves. While we have some sympathy with these
arguments (especially the first one pertaining to valuations), we still think an overweight
allocation on 30-year bonds is warranted.
For one, a long history of the 10s30s slope of IG spread curves going back to 2000
suggests that the current slope for non-financials ranks slightly above the historical
17 November 2021 38
Goldman Sachs
median (Exhibit 48). As such, the 10bp of flattening that has materialized over the course
of the past 12 months still leaves ample scope for further outperformance of the 30-year
part of the curve. Second, while historically long end spread curves exhibited a negative
correlation with yield curves (i.e., a flatter US Treasury yield curve coinciding with a
steeper corporate bond spread curve), this correlation has broken down in recent years
as illustrated in Exhibit 49, which shows that the differential between 30-year and
10-year spread-to-benchmark has turned essentially uncorrelated with the slope of the
US Treasury yield curve, after having exhibited a clear negative correlation previously.
Moreover, when measured using the Z-spread, the shift is even more pronounced, with
the slope of the spread curve exhibiting a positive correlation with the slope of the US
Treasury yield curve (Exhibit 50).
Exhibit 48: While the back end of spread curves has materially flattened in recent months, history suggests
room remains for further outperformance of 30-year spreads
Average spread differential between issuer-matched 30- and 10-year bonds
bp bp
Non-Financials 10s30s Financials 10s30s
80 80
60 60
40 40
20 20
0 0
-20 -20
-40 -40
-60 -60
-80 -80
-100 -100
2000 2003 2006 2009 2012 2015 2018 2021
17 November 2021 39
Goldman Sachs
Exhibit 49: When measured using spread to benchmark, the Exhibit 50: When measured using Z-spread, the slope of the 10s30s
relationship between the slope of the Treasury yield curve and the spread curve is actually positively correlated with the slope of the
slope of the spread curve has turned non-existent in recent years US Treasury yield curve
80 70
2000-2008 2015-2021
y = -0.15x + 43.17 2017-present 60
60 Mar-20
R² = 0.08
NonFinancial 10s30s (bp)
NonFinancial 10s30s (bp)

50
40
40 y = 0.18x + 36.39
R² = 0.21
20 30
20
0
y = -0.34x + 45.24 10
R² = 0.58
-20
0
Mar-20
-40 -10
-40 -20 0 20 40 60 80 100 120 140 0 20 40 60 80 100
Treasury 10s30s (bp) Treasury 10s30s (bp)
Source: iBoxx, Goldman Sachs Global Investment Research Source: iBoxx, Goldman Sachs Global Investment Research
7. Stay overweight leveraged loans over HY bonds on a more favorable tradeoff

between carry and duration
One of our core views since the Fed’s hawkish pivot at the June FOMC meeting has
been a preference for leveraged loans vs. HY bonds – a view that we recommend
capturing by going long the iBoxx leveraged loan index vs. the iBoxx USD HY index at a
1.25 to 1 ratio. We still retain conviction in this view for three reasons. First, the
carry/duration trade-off still favors leveraged loans. In particular, Exhibit 51 shows that
the carry differential between HY bonds and leveraged loans is at the low end of its
historical range while, at the same time, intermediate durations are biased towards
repricing higher as the Treasury curve continues to flatten – a relatively stronger
headwind for HY bonds. Of course, some of the tightening in the bond-loan carry
differential is the result of an overall higher quality HY index, but as fundamentals for
loan issuers continue to improve, we expect this differential to normalize. Second,
regardless of the rates backdrop, Exhibit 52 shows that the share of HY bonds trading
above their next call price sits near a record high. This level of negative convexity
mechanically constrains price returns within the USD HY market. By contrast, there
remains some modest upside in the leveraged loan market (again, Exhibit 52). Lastly,
the demand technical for leveraged loans continues to be a supportive tailwind with
consistent inflows week-after-week and record setting CLO creation.
17 November 2021 40
Goldman Sachs
Exhibit 51: The carry differential between HY bonds and leveraged Exhibit 52: The share of HY bonds trading above their next call
loans remains too thin price remain near all-time highs
The carry differential between HY bonds and leveraged loans, Share of HY bonds in the iBoxx HY index trading above the next call
calculated as the difference between the YTM on the ICE-BAML High prices vs. share of leveraged loans in the S&P LSTA index trading above
Yield Index and S&P/LSTA Leveraged Loan Index par
3.5% 3.5% 90% 90%

HY (Above next call price) Leveraged loans (Above par)
80% 80%
3.0% 3.0%
70% 70%
2.5% 2.5%
60% 60%
2.0% 2.0%
50% 50%
1.5% 1.5% 52%
40% 40%
1.0% 1.0%
30% 27% 30%
0.5% 0.5%
20% 20%
0.0% 0.0%
10% 10%
-0.5% -0.5% 0% 0%
2013 2014 2015 2016 2017 2018 2019 2020 2021
10 11 12 13 14 15 16 17 18 19 20 21
Source: S&P LCD, ICE-BAML, iBoxx, Goldman Sachs Global Investment Research Source: S&P LCD, Bloomberg, iBoxx, Goldman Sachs Global Investment Research
8. Stay overweight CLOs over plain vanilla bonds as the bid for complexity keeps
gaining momentum
CLOs continue to offer the best risk-reward tradeoff for unconstrained investors, in our
view. The proven stability of CLO structures will likely continue to attract broader
institutional participation in 2022, especially given the prospect of poor returns in “plain
vanilla” corporate bonds.
CLO new issue, refinancing, and reset volumes have remained elevated this year, as
many 2020 vintage deals with high weighted average cost of capital have been callable.
This strong primary market backdrop has weighed somewhat on secondary market
performance, as CLOs have generally underperformed similarly rated corporate bonds in
terms of spread tightening (Exhibit 53). But owing to their higher carry, BBB and BB
rated CLO tranches have delivered some of the strongest returns across the fixed
income complex in 2021. For unconstrained fixed income investors, we continue to think
mezzanine CLO tranches will deliver the highest risk-adjusted returns, with improving
fundamentals, low default risk, and especially attractive valuations relative to HY bonds
(again, Exhibit 53), outweighing the technical pressure from the strong activity in the
primary market. We also hold a similar view for AAA CLOs vs. IG-rated bonds, which
have consistently delivered strong risk-adjusted returns in comparison with other spread
products over the past decade. For context, the information ratio of AAA CLO excess
returns stands at 0.8, over two times larger than that of IG corporate bonds.
17 November 2021 41
Goldman Sachs
Exhibit 53: Relative to historical norms, the carry differential between CLOs and corporate bonds remains
attractive
bp bp
BBB CLO-HY AAA CLO-IG (RHS)
50 40
0 20
-50 0
-100 -20
-150 -40
-200 -60
-250 -80
-300 -100
-350 -120
2016 2017 2018 2019 2020 2021
Source: Bloomberg, Palmer Square, Goldman Sachs Global Investment Research
9. Long high carry in the EUR market: AT1, HY hybrid bonds over IG
For 2022, we continue to prefer high carry instruments in the EUR market such as
Additional Tier 1 debt (AT1s; the deeply subordinated debt issued by IG-rated European
bank parent companies) and corporate hybrid bonds, both of which we expect will
continue to outperform IG credit on a risk-adjusted basis. The strength (and
predictability) of the technical backdrop in the EUR market (due in part to a more
prudent and patient ECB) should continue to incentivize investors to rebalance their
portfolios into high carry securities given the low absolute level of yields. AT1s, in
particular, are attractive given banks’ strong fundamentals and conservative capital
manaw
One key risk for AT1s, in particular, is that they are more sensitive to a move higher in
European rates. For example, AT1s become less attractive when the yields on other
investments become more appealing. Second, extension risk is also an important
consideration for investors in AT1s. As rates increase, issuers of AT1s may have weaker
incentives to exercise call options and refinance this debt, which may result in AT1s
remaining outstanding longer than investors may have anticipated (i.e., past the first call
date).
17 November 2021 42
Goldman Sachs
Exhibit 54: We see scope for further compression of high carry securities, relative to EUR IG credit, in 2022
AT1 and hybrids spread ratios to IG
Ratio Ratio
ATI Hybrids (RHS)
6.5 3.1
2.9
6.0
High carry securities outperforming
2.7
5.5
2.5
5.0
2.3
4.5
2.1
4.0
1.9
3.5
1.7
3.0 1.5
2016 2017 2019 2020 2021
10. Long synthetic indices over cash on valuations

The CDS-cash basis in both the IG and HY markets spent the better part of the last 18
months repairing the material dislocation that emerged during the March 2020 sell-off
(Exhibit 55). By late October the IG cash synthetic basis had reached its 87th percentile
relative to the post-GFC history and in HY the basis had reached at its 80th percentile
(again, Exhibit 55). More importantly to us, the bases had completed a round trip back
above their pre-pandemic levels and at that time we moved to underweight cash vs.
synthetic in both markets based largely on valuation. Over the last few weeks this view
has been validated with cash sharply underperforming synthetics in both markets.
Though the recent underperformance of cash has helped bring the basis more in line
with historical averages, we still think the asymmetry favors synthetics. In addition, as
we published previously, there exists a fairly robust negative correlation between the
changes in cash spreads and changes in the basis. In other words, as cash spreads
widen, the basis tends to become more negative. Our forecast for modestly wider cash
spreads next year, combined with the current valuation asymmetry, leads us to remain
underweight cash vs. synthetic in both the HY and IG markets going into 2022.
17 November 2021 43
Goldman Sachs
Exhibit 55: The CDS-cash basis likely has further to fall after reverting back toward more normal levels in
recent weeks
CDS-cash basis for the constituents of the iBoxx HY and IG liquid indices
bp bp
IG HY
0 0
-50 -50
-100 -100
-150 -150
-200 -200
-250 -250
-300 -300
Jan-17 Sep-17 May-18 Jan-19 Sep-19 May-20 Jan-21 Sep-21
Source: Goldman Sachs Global Investment Research
17 November 2021 44
Goldman Sachs
Disclosure Appendix
Reg AC
We, Lotfi Karoui, Amanda Lynam, CPA, Marty Young, Spencer Rogers, CFA, Michael Puempel, Ph.D. and Marcelo Manzo, hereby certify that all of the
views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm’s business or client
relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.
Disclosures
Regulatory disclosures
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or
co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed
public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may trade as a
principal in debt securities (or in related derivatives) of issuers discussed in this report.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst’s area of coverage.
Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst
as officer or director: Goldman Sachs policy generally prohibits its analysts, persons reporting to analysts or members of their households from
serving as an officer, director or advisor of any company in the analyst’s area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be
associated persons of Goldman Sachs & Co. LLC and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on
communications with subject company, public appearances and trading securities held by the analysts.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and
regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the
Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any access to
it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. In
producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other
meetings hosted by the companies and other entities which are the subject of its research reports. In some instances the costs of such site visits or
meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific
circumstances relating to the site visit or meeting. To the extent that the contents of this document contains any financial product advice, it is general
advice only and has been prepared by Goldman Sachs without taking into account a client’s objectives, financial situation or needs. A client should,
before acting on any such advice, consider the appropriateness of the advice having regard to the client’s own objectives, financial situation and needs.
A copy of certain Goldman Sachs Australia and New Zealand disclosure of interests and a copy of Goldman Sachs’ Australian Sell-Side Research
Independence Policy Statement are available at: https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Brazil: Disclosure
information in relation to CVM Resolution n. 20 is available at https://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the
Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 20 of CVM Resolution n. 20, is the first author
named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The
Goldman Sachs Group Inc. and therefore is included in the company specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs
Canada Inc. has approved of, and agreed to take responsibility for, this research report in Canada if and to the extent that Goldman Sachs Canada Inc.
disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research
may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this
research may be obtained from Goldman Sachs (India) Securities Private Limited, Research Analyst - SEBI Registration Number INH000001493, 951-A,
Rational House, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India, Corporate Identity Number U74140MH2006FTC160634, Phone +91 22
6616 9000, Fax +91 22 6616 9001. Goldman Sachs may beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian
Securities Contracts (Regulation) Act, 1956) of the subject company or companies referred to in this research report. Japan: See below. Korea: This
research, and any access to it, is intended only for “professional investors” within the meaning of the Financial Services and Capital Markets Act,
unless otherwise agreed by Goldman Sachs. Further information on the subject company or companies referred to in this research may be obtained
from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither “registered banks”
nor “deposit takers” (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for
“wholesale clients” (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. A copy of certain Goldman Sachs
Australia and New Zealand disclosure of interests is available at: https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Russia:
Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not
having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity.
Research reports do not constitute a personalized investment recommendation as defined in Russian laws and regulations, are not addressed to a
specific client, and are prepared without analyzing the financial circumstances, investment profiles or risk profiles of clients. Goldman Sachs assumes
no responsibility for any investment decisions that may be taken by a client or any other person based on this research report. Singapore: Goldman
Sachs (Singapore) Pte. (Company Number: 198602165W), which is regulated by the Monetary Authority of Singapore, accepts legal responsibility for
this research, and should be contacted with respect to any matters arising from, or in connection with, this research. Taiwan: This material is for
reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the
responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is
defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered
companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks
warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.
European Union and United Kingdom: Disclosure information in relation to Article 6 (2) of the European Commission Delegated Regulation (EU)
(2016/958) supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council (including as that Delegated Regulation is
implemented into United Kingdom domestic law and regulation following the United Kingdom’s departure from the European Union and the European
Economic Area) with regard to regulatory technical standards for the technical arrangements for objective presentation of investment
recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of
conflicts of interest is available at https://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of
Interest in Connection with Investment Research.
17 November 2021 45
Goldman Sachs
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho
69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association.
Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to
any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance
Company.
Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis.
Analysts based in Goldman Sachs offices around the world produce research on industries and companies, and research on macroeconomics,
currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in
Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; Public Communication Channel Goldman Sachs Brazil: 0800 727 5764
and / or contatogoldmanbrasil@gs.com. Available Weekdays (except holidays), from 9am to 6pm. Canal de Comunicação com o Público Goldman Sachs
Brasil: 0800 727 5764 e/ou contatogoldmanbrasil@gs.com. Horário de funcionamento: segunda-feira à sexta-feira (exceto feriados), das 9h às 18h; in
Canada by either Goldman Sachs Canada Inc. or Goldman Sachs & Co. LLC; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs
(India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in
New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company
Number: 198602165W); and in the United States of America by Goldman Sachs & Co. LLC. Goldman Sachs International has approved this research in
connection with its distribution in the United Kingdom.
Effective from the date of the United Kingdom’s departure from the European Union and the European Economic Area (“Brexit Day”) the following
information with respect to distributing entities will apply:
Goldman Sachs International (“GSI”), authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority
(“FCA”) and the PRA, has approved this research in connection with its distribution in the United Kingdom.
European Economic Area: GSI, authorised by the PRA and regulated by the FCA and the PRA, disseminates research in the following jurisdictions
within the European Economic Area: the Grand Duchy of Luxembourg, Italy, the Kingdom of Belgium, the Kingdom of Denmark, the Kingdom of
Norway, the Republic of Finland, Portugal, the Republic of Cyprus and the Republic of Ireland; GS -Succursale de Paris (Paris branch) which, from Brexit
Day, will be authorised by the French Autorité de contrôle prudentiel et de resolution (“ACPR”) and regulated by the Autorité de contrôle prudentiel et
de resolution and the Autorité des marches financiers (“AMF”) disseminates research in France; GSI - Sucursal en España (Madrid branch) authorized in
Spain by the Comisión Nacional del Mercado de Valores disseminates research in the Kingdom of Spain; GSI - Sweden Bankfilial (Stockholm branch) is
authorized by the SFSA as a “third country branch” in accordance with Chapter 4, Section 4 of the Swedish Securities and Market Act (Sw. lag
(2007:528) om värdepappersmarknaden) disseminates research in the Kingdom of Sweden; Goldman Sachs Bank Europe SE (“GSBE”) is a credit
institution incorporated in Germany and, within the Single Supervisory Mechanism, subject to direct prudential supervision by the European Central
Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) and
Deutsche Bundesbank and disseminates research in the Federal Republic of Germany and those jurisdictions within the European Economic Area
where GSI is not authorised to disseminate research and additionally, GSBE, Copenhagen Branch filial af GSBE, Tyskland, supervised by the Danish
Financial Authority disseminates research in the Kingdom of Denmark; GSBE - Sucursal en España (Madrid branch) subject (to a limited extent) to local
supervision by the Bank of Spain disseminates research in the Kingdom of Spain; GSBE - Succursale Italia (Milan branch) to the relevant applicable
extent, subject to local supervision by the Bank of Italy (Banca d’Italia) and the Italian Companies and Exchange Commission (Commissione Nazionale
per le Società e la Borsa “Consob”) disseminates research in Italy; GSBE - Succursale de Paris (Paris branch), supervised by the AMF and by the ACPR
disseminates research in France; and GSBE - Sweden Bankfilial (Stockholm branch), to a limited extent, subject to local supervision by the Swedish
Financial Supervisory Authority (Finansinpektionen) disseminates research in the Kingdom of Sweden.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and
forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority
of reports are published at irregular intervals as appropriate in the analyst’s judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment
banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division.
Goldman Sachs & Co. LLC, the United States broker dealer, is a member of SIPC (https://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal
trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and
investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
We and our affiliates, officers, directors, and employees, will from time to time have long or short positions in, act as principal in, and buy or sell, the
securities or derivatives, if any, referred to in this research, unless otherwise prohibited by regulation or Goldman Sachs policy.
The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not
necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.
Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the
products mentioned that are inconsistent with the views expressed by analysts named in this report.
This research is focused on investment themes across markets, industries and sectors. It does not attempt to distinguish between the prospects or
performance of, or provide analysis of, individual companies within any industry or sector we describe.
Any trading recommendation in this research relating to an equity or credit security or securities within an industry or sector is reflective of the
investment theme being discussed and is not a recommendation of any such security in isolation.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options and futures disclosure documents which are available from Goldman Sachs sales representatives or at
17 November 2021 46
Goldman Sachs
https://www.theocc.com/about/publications/character-risks.jsp and
https://www.fiadocumentation.org/fia/regulatory-disclosures_1/fia-uniform-futures-and-options-on-futures-risk-disclosures-booklet-pdf-version-2018.
Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation
will be supplied upon request.
Differing Levels of Service provided by Global Investment Research: The level and types of services provided to you by the Global Investment
Research division of GS may vary as compared to that provided to internal and other external clients of GS, depending on various factors including your
individual preferences as to the frequency and manner of receiving communication, your risk profile and investment focus and perspective (e.g.,
marketwide, sector specific, long term, short term), the size and scope of your overall client relationship with GS, and legal and regulatory constraints.
As an example, certain clients may request to receive notifications when research on specific securities is published, and certain clients may request
that specific data underlying analysts’ fundamental analysis available on our internal client websites be delivered to them electronically through data
feeds or otherwise. No change to an analyst’s fundamental research views (e.g., ratings, price targets, or material changes to earnings estimates for
equity securities), will be communicated to any client prior to inclusion of such information in a research report broadly disseminated through electronic
publication to our internal client websites or through other means, as necessary, to all clients who are entitled to receive such reports.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For research, models or other data related to one or more securities, markets or asset classes (including related
services) that may be available to you, please contact your GS representative or go to https://research.gs.com.
Disclosure information is also available at https://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
© 2021 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written
consent of The Goldman Sachs Group, Inc.
17 November 2021 47

2022 Global Credit Outlook - GS

Uploaded by

Copyright:

Available Formats

You might also like

2022 Global Credit Outlook - GS

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2022 Global Credit Outlook - GS

Uploaded by

Copyright:

Available Formats

17 November 2021 | 5:51PM EST

2022 Global Credit Outlook: Between a rock and a hard

of persistent supply chain disruptions and inﬂationary headwinds; 3. exposure to the

Between a rock and a hard place

Modest widening, low returns and higher dispersion

IG 107 107 108 109 110 112

30% 2021: ~6.7% 20%

Source: Bloomberg, Goldman Sachs Global Investment Research

2.0 2.0 -0.2 -0.2

1.5 1.5 -0.3 -0.3

1.0 1.0 -0.4 -0.4

0.5 0.5 -0.5 -0.5

0.0 0.0 -0.6 -0.6

Source: Bloomberg, Goldman Sachs Global Investment Research

Source: ICE-BAML, Bloomberg, Moody’s, Goldman Sachs Global Investment Research

Source: Moody’s, Goldman Sachs Global Investment Research

Source: ICE-BAML, Haver Analytics, Goldman Sachs Global Investment Research

140% Funded Ratio

Fixed income allocation

Source: Milliman, Goldman Sachs Global Investment Research

Source: Goldman Sachs Global Investment Research

Chemicals, Diversiﬁed Manufacturing, and Building Materials outperformed.

Packaging Construction Machinery

Note: As of November 15, 2021. Note: As of November 15, 2021.

In the USD IG market, we recommend overweight allocations to Energy, Banks

challenging inﬂationary backdrop given HY ﬁrms’ generally weaker fundamentals. We

ESG: Demand will remain (well) ahead of supply

Source: EPFR, Goldman Sachs Global Investment Research

Exhibit 16: A new record-setting year for ESG-related issuance

100 Green 6 140 25

Source: Dealogic, Goldman Sachs Global Investment Research

Despite the increase in issuer diversiﬁcation, investor demand continues to outweigh

Count USD EUR Count ESG borrower discount

0 -5 -10 -15 -20 -25

Fundamentals: From balance sheet repair to shareholder returns

28% 28% Ratio Ratio

-22% -22% 1.3 2.3

2,850 HY WARF 2,850

2,450 Lower WARF = higher credit quality 2,450

Source: iBoxx, Goldman Sachs Global Investment Research

300 400 100

Source: FactSet, Goldman Sachs Global Investment Research

Rating migrations and defaults: Still benign

Source: Moody’s, Goldman Sachs Global Investment Research

-50 -50 -20 -20

-100 -100 -40 -40

-150 -150 -60 -60

-200 -200 -80 -80

Source: Bloomberg, Goldman Sachs Global Investment Research

Supply technicals: Back to normal

Source: Dealogic, Goldman Sachs Global Investment Research

Source: Bloomberg, Dealogic, Goldman Sachs Global Investment Research

Source: Dealogic, Goldman Sachs Global Investment Research

Source: Bloomberg, Dealogic, Goldman Sachs Global Investment Research

Demand technicals: Incrementally weaker in the USD market, less so in EUR

Source: ECB, Bloomberg, Goldman Sachs Global Investment Research

Inﬂation: Low risk, high severity

% change, year ago % change, year ago