Credit market commentary: June 2019

Data as of June 30, 2019 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 rebounds in June: The leveraged credit markets rose in June amid rising U.S. equity prices, optimism surrounding a China-U.S. trade truce and declining interest rates. HY Bonds rallied significantly in June, more than erasing the declines of May, as inflows into the asset class accelerated.¹ In a reversal from the outflows of May, HY Bond mutual funds pulled in approximately $2.2 billion in June and have now experienced $12.1 billion in inflows year to date.² Drilling down deeper into HY Bond returns, higher-rated areas of the market generally outperformed their lower-rated peers. Last month, BB rated bonds returned 2.80%, while B rated bonds and CCC rated bonds returned 2.34% and 1.38%, respectively.^3,4,5 Senior Secured Loans reversed most of their May declines but were only slightly positive in June.⁶ Amid a repricing of Fed fund expectations, outflows from bank loan mutual funds persisted, with the asset class experiencing 32 straight weeks of outflows at month-end.² Senior Secured Loans underperformed the Barclays Agg, which benefited from its high sensitivity to duration, as Treasury yields declined sharply across the curve amid growing expectations of an interest rate cut by the Federal Reserve at its next meeting.

HY Bonds benefit from repriced rate expectations: With Fed fund futures pricing in at least two, and possibly three, rate cuts before year-end, demand for floating rate Senior Secured Loans continued to decline in June. Following nine straight monthly outflows, bank loan mutual fund AUM has declined from a little over $108 billion to just under $78 billion. While new collateralized loan obligation (CLO) issuance has more than made up for this decline in demand, Senior Secured Loans continue to face selling pressure from this corner of the market. HY Bonds, on the other hand, have benefited from the repricing of interest rate expectations as investors seek out higher-yielding fixed-rate investments. HY Bond yields declined approximately 70 basis points in June to end the month at 6.06%, while spreads over Treasuries declined a more modest 53 basis points to 4.20%.⁷ This excess yield, combined with stable corporate fundamentals and a benign corporate default environment, may continue to underpin investors’ demand for HY Bonds through the remainder of the year.⁸ However, further outflows from bank loan mutual funds may lead to some additional volatility for Senior Secured Loans.

Key takeaway

The likelihood of Fed rate cuts sent Treasury rates lower, boosting the duration-sensitive Barclays Agg, while optimism surrounding U.S.-China trade talks was a tailwind for leveraged credit.