Data as of May 31, 2019 unless otherwise noted
Performance (total returns)
| Benchmarks | May 2019 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | 1.78% | 4.80% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | -1.27% | 7.52% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | -0.22% | 5.49% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Leveraged credit declines in May: The leveraged credit markets were lower in May as declining U.S. equities, China-U.S. trade tensions and global growth concerns contributed to weaker demand for risk assets. HY Bonds posted their first negative monthly return of 2019 as the S&P 500 slid -6.35% and 10-year U.S. Treasury yields declined to their lowest levels since 2017.1,2 Alongside the general decline in risk assets, lower-rated credits generally underperformed their higher-rated peers. In May, BB rated bonds returned -0.73%, while B rated bonds and CCC rated bonds returned -1.42% and -2.93%, respectively.1 In the first monthly outflow since December, investors pulled nearly $4.1 billion from high yield bond mutual funds in May.3 Nevertheless, against the backdrop of stable corporate earnings and near-historic low default rates, HY Bond returns remain strongly positive year to date, outperforming Senior Secured Loans as well as core fixed income investments so far in 2019.1,4,5 Senior Secured Loans declined -0.22% in May, the second straight negative monthly return for the asset class, as outflows from bank loan mutual funds accelerated.3 Senior Secured Loans underperformed the Barclays Agg, which benefited from its high sensitivity to duration as Treasury yields declined sharply across the curve, but easily outperformed both the S&P 500 and HY Bonds.3,5
Prices decline to two-month lows despite stable fundamentals: HY Bond and Senior Secured Loan prices each declined to a two-month low on the last trading day of May, weighed down by U.S. equities, which experienced their worst monthly performance since December 2018. HY Bond yields rose approximately 59 bps in May to end the month at a two-month high of 6.76%.6 The rise in yields comes despite stable corporate fundamentals, solid U.S. economic growth and a benign corporate default environment.7 This, combined with an accommodative Fed, may continue to underpin positive returns for both HY Bonds and Senior Secured Loans through the remainder of the year. However, with Fed fund futures currently pricing in at least one rate cut before year-end, bank loan mutual funds may experience additional outflows amid diminished demand for floating-rate investments. While institutional demand for Senior Secured Loans remains robust, further outflows from mutual funds may lead to some additional volatility for the asset class, furthering the case for active management and careful credit selection in the months ahead.
Key takeaway
Credit markets broadly fell as a global flight to quality boosted the duration-sensitive Barclays Agg. 10-year U.S. Treasury rates fell to 20-month lows as trade tensions continued to escalate.
