Credit market commentary: January 2020

Data as of January 31, 2020 unless otherwise noted

Performance (total returns)

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Leveraged credit mixed in January: Leveraged credit continued its year-end rally during the first half of January amid an improving macroeconomic backdrop including the signing of the long-awaited phase one trade deal between the U.S. and China. However, month-to-date gains in high yield were subsequently erased alongside an uptick in equity volatility as markets weighed the impact of the coronavirus on global growth. Senior Secured Loans gave up some of their gains but still posted a 0.56% return.¹ During the last week of January, HY Bond mutual funds saw their biggest weekly outflow since August 2019 as demand waned amid market jitters.² Although Senior Secured Loans recorded net inflows for the month of $106 million, the asset class has still experienced outflows for 60 of the last 63 weeks, and bank loan mutual funds lost $38.3 billion of AUM in 2019.² Meanwhile, the Barclays Agg posted a strong return (1.92%) in January following three months of roughly flat returns.³ Benefiting from its high sensitivity to duration, the Barclays Agg appreciated as U.S. Treasury yields fell roughly 40 bps throughout the month.

A tale of two halves: Performance by both credit rating and asset class varied drastically between the first half of January and the second. Both HY Bonds and Senior Secured Loans started the year strong, with CCC rated credits in each asset class outperforming their higher-rated counterparts on what appeared to be a broad “risk-on” sentiment throughout markets. As news of the coronavirus outbreak spread, the markets diverged. High yield spreads widened by 48 bps over the course of the month, the largest monthly spread widening since May 2019, as bonds gave up their month-to-date gains and ended January flat. Lower-rated HY Bonds fared the worst, as CCCs ended the month down -0.44% followed by single B rated at -0.30%.⁴  BB rated bonds returned 0.35%,⁴ benefiting from both their higher credit rating and longer duration. It was a different story for loans. Senior Secured Loans lost some of their early January gains, but still posted positive performance led by the lowest-rated loans. CCCs returned 1.29% followed by single B rated loans, which returned 0.66%, and BBs, which returned 0.30%.¹

Key takeaways

• January was a mixed month for leveraged credit.
• HY Bonds ended January flat while Senior Secured Loans returned 0.56%.
• The duration-sensitive Barclays Agg rallied as rates fell over 40 bps over the course of the month.