Data as of February 28, 2022, unless otherwise noted.
Performance (total returns)
| Benchmarks | February 2022 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | -1.12% | -3.25% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | -0.90% | -3.62% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | -0.51% | -0.15% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Volatility continues in February: January’s volatility spilled into February with most major asset classes posting another monthly decline. Continuing concerns over inflation, interest rate volatility and the impending Fed tightening cycle weighed on markets to start the month before focus shifted squarely to geopolitical tensions. The S&P 500 fell -2.99% while high yield bonds declined -0.90%. Senior secured loans, which were a lone bright spot in credit and fixed income markets during January, fell over the back half of the month amid broader risk-off sentiment as geopolitical tensions escalated, losing -0.51% in February. U.S. Treasury yields initially rose before declining sharply amid the late month flight to quality. Despite the sharp decline in yields, the duration sensitive Bloomberg Agg was unable to pare early month losses, down -1.12% in February. Credit fundamentals remain on solid footing reflecting favorable underlying economic conditions. Default activity was benign in February. The Trailing Twelve Month (TTM) rate ended the month at 0.32% and 0.61% in high yield and loans, respectively. Importantly, despite spread widening in the high yield market this year, levels of distress in the market remain negligible. Only 1.3% of the bond universe is trading at levels classified as distressed, signaling few changes to the current low default environment.
Rates drive YTD high yield price action: Interest rate moves have had a cascading effect throughout markets this year, with duration sensitive assets such as investment grade corporate bonds and low-rate beneficiary growth stocks sharply underperforming. Decomposing this year’s high yield bond decline shows that this asset class, too, has been trading largely in response to rising interest rates. In a typical risk-off environment, we would expect CCC-rated bonds to underperform higher-rated BB bonds. This year we have predominantly seen the opposite: BB bonds, which theoretically have the most duration sensitivity, have underperformed CCCs. Confirming this theory, when geopolitical tensions flared in late February, sparking a flight to quality and interest rates declined, the typical relationship resumed: BB-rated bonds outperformed riskier CCCs. While high yield bond markets can ebb and flow based on duration or broad risk sentiment in markets, we think it is crucial to emphasize that credit fundamentals and economic growth are, in our view, the most important long-term return drivers. The backdrop for credit remains strong; default rates are low, fundamentals have vastly improved and our expectation is for above trend economic growth.
Key takeaways
- Market volatility continued in February. High yield bonds lost -0.90% on the month, while loans—which remained positive during January’s decline—capitulated last month, down -0.51%.
- High yield bonds have largely been trading in response to rising interest rates this year, with the highest-rated, most duration sensitive assets declining the most.
- In the long run, fundamentals are a more important driver of credit market returns. Despite a challenging start to the year, we believe credit remains on solid footing.
