Data as of June 30, 2022, unless otherwise noted.
Performance (total returns)
| Benchmarks | June 2022 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | -1.57% | -10.35% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | -6.81% | -14.04% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | -2.16% | -4.55% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets decline in June: Volatility continued to roil markets last month. The combination of persistent inflation, the Fed’s first 75 basis point rate hike since 1994 and concerns about slowing economic growth weighed heavily on risk assets. The S&P 500 was down -8.3%, high yield bonds lost -6.8%—their worst month of 2022—and loans declined -2.16%. This marked the first back-to-back monthly declines of greater than 2% in the loan market since 2008. In a sign that recession fears were at the forefront, the lowest rated CCC borrowers led the declines in both markets. The 10-year U.S. Treasury yield rose sharply during the first half of the month, peaking at 3.47%, its highest level since 2011, before a flight to quality sent yields lower. The duration sensitive Bloomberg Aggregate Bond Index was unable to recoup early month losses, and ended June down -1.57%, capping off its worst start to a year in history. Credit issuance remained subdued amid ongoing volatility in the secondary market. On a year-over-year basis, high yield bond issuance is down 76% compared to the same period in 2021, while loan issuance is 63% lower. Despite this dearth of issuance, credit issuers appear well capitalized, having taken advantage of the favorable funding environment of the past two years and are not facing a near-term maturity wall. There were two defaults in June, impacting both bonds and loans and the trailing twelve-month default rates rose above 1% for the first time since August 2021, ending at 1.08% and 1.14% in high yield and loans, respectively. Distress in the market has begun to increase slightly. Roughly 8.6% of the high yield market trades at spreads wider than 1,000 basis points while 2.8% of the loan market trades at levels considered distressed.
First half recap and what’s next for credit? On a year-to-date basis, high yield bonds and senior secured loans are down -14.0% and -4.6%, respectively. This is the worst first half of a year in the high yield bond market’s history, and among the worst starts in the history of the loan market, second only to the COVID crash in 2020. Leadership at the asset class level has swayed as market sentiment has swung between inflation fears and growth concerns. During periods of swiftly rising interest rates, like much of Q1, markets have shown a clear preference for credit risk over duration risk, leading to outperformance by lower quality assets like loans and CCC-rated bonds. We saw sharp ratings decompression as growth concerns took hold in May, with CCCs drastically underperforming while investors sought the relative quality of BB bonds. When inflation and interest rate concerns roared back to the fore in June, loans and CCCs were once again relative outperformers. Although we do not believe inflation concerns will fade far from view, we do believe growth concerns will likely take precedence over the back half of the year, and expect higher quality assets, specifically BB rated issues and high yield bonds vs. senior secured loans, to be relative outperformers in this environment.
Key takeaways
- Volatility roared back in June. High yield bonds lost -6.8%, their worst month of 2022, while loans were down -2.16%. This marked the first back-to-back monthly declines of greater than 2% for loans since 2008.
- Despite a late month decline in rates, the duration sensitive Bloomberg Agg was unable to recoup early month losses, declining -1.57% in June.
- The first half of 2022 was the worst start to a year on record for the high yield bond market and second worst for the loan market. As recession risks mount, we believe higher quality assets, specifically BB-rated issues and high yield bonds vs. loans, will be relative outperformers in the second half of the year.
