Data as of March 31, 2018 unless otherwise noted
Performance (total returns)
| Benchmarks | March 2018 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index | 0.64% | -1.46% |
| ICE BofAML U.S. High Yield Master II Index | -0.64% | -0.92% |
| S&P/LSTA Leveraged Loan Index | 0.25% | 1.45% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Corporate credit benchmarks were mixed in March, with the S&P/LSTA Leveraged Loan Index (senior secured loans) posting a modest gain, while the ICE BofAML High Yield Bond Index (high yield bonds) posted a modest decline. Against the backdrop of a decline in U.S. equities and rising market volatility, leveraged credit investors migrated up the corporate capital structure, with higher-rated investments generally outperforming their lower-rated peers. More broadly, the Bloomberg Barclays U.S. Aggregate Bond Index (the Barclays Agg) generated a positive return in March, benefiting from the benchmark’s high duration sensitivity as long-term U.S. Treasury yields declined.
High yield bonds decline for a second month: High yield bonds returned -0.64% in March, the second straight monthly decline.1 Amid a rise in short-term Treasury bond yields and a spike in U.S. equity volatility, high yield bond mutual funds recorded an outflow of approximately $2.3 billion in March, which brings the year-to-date outflow to approximately $19.3 billion.2 Alongside a 7 bps rise in U.S. 2-year Treasury yields, high yield bond prices declined $0.89 and high yield bond yields widened by approximately 18 bps to 6.34% as of March 31.1,3,4 For perspective, high yield bond yields were sitting at a 2017 low of 5.37% in October. Against the backdrop of increased risk aversion, the higher-rated areas of the bond market held up slightly better than their lower-rated peers, a turnaround from the recent trend. In March, BB rated and B rated bonds generated a total return of -0.62% and -0.52%, respectively.5,6 By comparison, CCC rated bonds provided total returns of -1.00% in March.7
Senior secured loans post gains in March: While last month’s decline in high yield bond prices weighed slightly on the senior secured loan market, the asset class appeared somewhat insulated from broader market volatility. The asset class recorded a gain of 0.25% in March, the asset class’s seventh straight monthly gain.8 Benefiting from their floating rate coupon and position at the top of the corporate capital structure, senior secured loan prices have continued to rise since the outset of 2018, even as bond prices declined.8 For context, senior secured loan prices are up $0.35 since December 31, 2017, as increased interest rate concerns raised the appeal of the asset class, versus a $2.12 decline in high yield bond prices.1,8 Year to date, senior secured loans are now providing returns of 1.45% after returning 4.12% in 2017.8 By comparison, high yield bonds, U.S. 10-year Treasuries and the Barclays Agg are providing a year-to-date return of -0.92%, -2.39% and -1.46%, respectively.1,9,10
Key takeaway
Benefiting from their floating rate coupon and position at the top of the capital structure, senior secured loan prices remained relatively steady in the face of rising short-end U.S. Treasury yields and a decline in U.S. equity prices. Investments with lower durations, such as senior secured loans, have outperformed thus far in 2018 and may display lower levels of volatility if short-term interest rates rise further.
