Data as of September 30, 2019 unless otherwise noted
Performance (total returns)
| Benchmarks | September 2019 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | -0.53% | 8.52% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 0.32% | 11.50% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 0.47% | 6.79% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Leveraged credit rises in September: Leveraged credit markets rose in September, with Senior Secured Loans slightly outperforming HY Bonds.1,2 Senior Secured Loans benefited from a deceleration in outflows from bank loan mutual funds and ongoing institutional demand as investors continue to seek out higher-yielding investments. Notably, the market for Senior Secured Loans has recently shifted from one of excess supply to one of excess demand, which has supported prices. HY Bonds also benefited from favorable technicals as HY Bond mutual funds experienced $4.9 billion in inflows during September.³ After accounting for September’s large inflow, inflows into HY Bond mutual funds total more than $15.8 billion in 2019. By contrast, investors have pulled nearly $27.9 billion from bank loan mutual funds so far this year as demand for floating-rate investments declined somewhat amid declining U.S. Treasury yields and diminished inflation expectations. After recording a healthy gain the month prior, the Barclays Agg turned negative in September as long-term U.S. Treasury yields rebounded from the lows experienced in August.⁴
Fundamentals and technicals balanced for now: Following 12 straight monthly outflows, bank loan mutual fund AUM has declined from a little over $108 billion to $71.5 billion.³ While new collateralized loan issuance and repayments of existing loans have made up for this decline in demand, Senior Secured Loan price appreciation has been limited in our view by selling pressure from this corner of the market.⁵ HY Bonds, conversely, have benefited from declining interest rate expectations as investors have sought out higher-yielding, fixed-rate investments. HY Bond yields ended the month at 5.87%, while spreads over Treasuries ended the month at 4.20%.⁶ This excess yield, combined with stable corporate fundamentals and a benign corporate default environment, may continue to underpin demand for HY Bonds.⁷ However, further outflows from bank loan mutual funds may continue to limit price appreciation for Senior Secured Loans, with coupons expected to account for much of the anticipated returns through the remainder of the year.
Key takeaways
- Leveraged credit rose in September with loans outperforming HY Bonds.
- The duration-sensitive Barclays Agg was unable to recover from an early-month rate spike, ending down 53 basis points.
