Data as of April 30, 2023, unless otherwise noted.
Performance (total returns)
| Benchmarks | April 2023 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | 0.61% | 3.59% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 0.93% | 4.58% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 1.05% | 4.26% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Risk assets outperformed in April: Following an extraordinarily volatile March, the Merrill Lynch Option Volatility Estimate (MOVE) Index declined throughout April as the 2- and 10-year Treasury yields were generally flat to lower by month end. Credit markets turned higher amid the more settled macro environment. Senior secured loans returned 1.05% while high yield bonds returned 0.93%. Amid a solid macro backdrop featuring relatively healthy fundamentals among high yield issuers, lower-rated assets again outperformed in April. CCC loans returned 1.48% compared to 0.86% and 1.15% for BB and B loans, respectively. The delta was wider among bonds as CCC bonds returned 1.93% and BB bonds returned 0.67%. Year to date through April, CCC bonds are outperforming BB bonds by 322 bps and CCC loans are outperforming BB loans by 197 bps. Treasury yields bounced around in April, driven by conflicting signals on economic growth. The 2-year Treasury yield ultimately finished the month flat compared to March, at 4.06% while the 10-year Treasury yields finished April -4 basis points lower. Against this backdrop, the Bloomberg Agg returned 0.61%. The 10- and 2-year Treasury curve inversion also remained relatively unchanged on the month, at approximately -60 basis points. High yield issuance picked up significantly in April as the market reopened after having effectively closed for much of March. HY issuance totaled $18.8 billion compared to just $5.6 billion a month earlier. Loan issuance picked up in late April and totaled $19.0 billion over the month, up slightly versus the $17.4 billion of loans issued in March. High yield bond funds saw inflows of nearly $7.7 billion in April, which marked their first monthly inflow this year as retail demand recovered. On the other hand, demand for loan funds continued to be weak throughout April. The loan asset class has experienced outflows in 35 of the past 36 weeks, totaling over -$26.8 billion in outflows over that period. Default activity accelerated in April, with four defaults and two distressed exchanges. High yield bonds’ trailing 12-month default rate including distressed exchanges, rose 27 basis points month over month (MoM) in April to 2.18% while senior secured loans rose 51 basis points to 2.74%. While the default rate rose for both markets, they remain below the long-term average of 3.2% and 3.1% for high yield bonds and senior secured loans, respectively.
Credit performed well after previous Fed pauses: Just after month-end, the Fed raised rates 25 bps and is now expected to pause following a full 500 bps of rate hikes for this cycle. Credit has generated solid returns across the five periods over the past 30 years where the Fed paused after a series of rate hikes. High yield bonds and senior secured loans have averaged 12.30% and 7.51%, respectively, in the 12-month period following a Fed rate.1 While each period was unique, credit markets generally benefited from higher yields as a result of the Fed’s rate hikes and improved sentiment as investors began to price in potential rate cuts. On average, spreads on high yield bonds tightened -26 basis points in the subsequent 12-month period.1
Key takeaways
- Following an extraordinarily volatile March, credit markets turned higher amid the more settled macro environment. Senior secured loans led the way, returning 1.05% while high yield bonds returned 0.93% in April. Amid improved sentiment, CCC securities outperformed higher-rated BB assets during the month.
- With the Fed likely on hold following its latest rate hike, credit has historically performed well in other past instances following a pause in Fed rate hikes. High yield bonds and senior secured loans have averaged 12.30% and 7.51%, respectively, in the 12-month period following a Fed rate.1
