Data as of September 30, 2023, unless otherwise noted.
Performance (total returns)
| Benchmarks | September 2023 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | -2.54% | -1.21% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | -1.16% | 5.97% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 0.96% | 10.16% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Key takeaways
- Credit markets were mixed in September as investors increasingly accepted that rates may remain elevated for an extended period. High yield bonds returned -1.16% while senior secured loans returned 0.96%. Both indexes were again led by CCC-rated securities, which tend to be less sensitive to rising rates.
- Corporate fundamentals remain firm. Low leverage and high levels of interest coverage provide a solid underpinning for credit markets while default rates remain well below their long-term averages. Yet softening earnings among high yield issuers suggest a note a caution may be warranted.
Credit markets mixed in September: Markets adjusted to a clear higher-for-longer pivot by Fed policymakers in September as the Agg (-2.54%) sold off while less duration-sensitive high yield bonds saw a milder decline of approximately -1.2%. At 0.96%, loans outperformed high yield bonds by the largest amount since August 2022. Amid the elevated yield environment, both indexes have generated strong year-to-date returns of 5.7% and 10.1%, respectively. High yield spreads widened modestly in September amid heightened equity volatility while loan spreads briefly touched their lowest point over the past year driven by continued institutional demand. Lower-rated bonds tend to be less duration-sensitive and therefore continued to outperform amid September’s rising-rate environment. CCC bonds returned -0.6% compared to -0.98% and -1.44% for B and BB bonds. CCC loans returned 1.59% in September versus 0.63% for BB loans.
September finally saw the credit market start to open for new issuance after several months of below average primary market activity. High yield issuance of $24.6 billion was the highest monthly issuance since Jan. 2022. YTD issuance of $136.6 billion is well above the $90.0 billion of issuance over the same period last year. Driven by a recent surge in refinancing/repricing activity, loan issuance rose to $58.1 billion in September, which marks the most activity since February 2023’s $48.8 billion of issuance. Demand for senior secured loans has steadily improved as inflows totaled approximately $48 million and $582 million in August and September, respectively, following five consecutive months of net outflows. On the other hand, high yield bonds have seen outflows of approximately -$1.6 billion and -$2.4 billion in August and September, respectively amid equity volatility and a high-for-longer reset.
Credit fundamentals remain firm, caution may be warranted: Strong corporate fundamentals, particularly low levels of leverage and high levels of interest coverage, have provided a firm underpinning for credit markets. Additionally, high yield bond and senior secured loan default rates of 2.11% and 2.66%, respectively, remain well below their long-term averages of 3.2% and 3.1%. However, Q2 saw the first year-over-year earnings decline in high yield and the weakest growth in loans since 2020. While companies are entering this period of softer earnings from a solid base, a note of caution may be warranted should these statistics see any material deterioration. For now, credit issuers appear positioned well to absorb slower economic growth.
