Data as of June 30, 2020 unless otherwise noted.
Performance (total returns)
| Benchmarks | June 2020 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | 0.63% | 6.14% |
| ICE BofAML U.S. High Yield Master II Index (HY Bonds) | 0.97% | -4.78% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 1.14% | -4.61% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Leveraged credit recovery continued at a slower pace in June: The recovery in credit markets continued in June, albeit at a slower pace. Investors were left with mixed signals as green shoots of strong economic data and a supportive Fed were balanced by news of rising COVID cases that may threaten to delay or reverse reopening procedures in many states. Despite sliding over the second half of the month, both HY Bonds and Senior Secured Loans posted positive returns in June, up 0.97% and 1.14%, respectively. Though they have yet to return fully to pre-COVID levels, the recovery in markets thus far has been almost as quick as the descent. June capped off the best quarter in both markets since Q3 2009 directly on the heels of the worst quarter since Q4 2008. June saw the strongest month on record of new issuance in the high yield market, and retail investors continued to pour money into the asset class. Loan issuance also increased compared to the past few months but remains subdued year over year. Loan funds have continued to see outflows, but CLO issuance, a key source of demand in the loan market, has picked up.
On a relative basis, credit valuations are still attractive: Spreads for both HY Bonds and Senior Secured Loans have tightened significantly since bottoming on March 23, prompting questions surrounding the degree of further tightening market participants can expect. However, examining these levels on both a relative basis versus equities and from a historical context shows that credit valuations still remain attractive. HY Bond spreads are currently in their 27th percentile historically while loan spreads are in their 15th. Said another way, HY Bonds have been more expensive than they are today 73% of the time and loans 85% of the time. Even given the uncertain economic backdrop, these levels suggest potential for modest further spread tightening, and the case is made even stronger when comparing cross-asset valuations. The recent market recovery has pushed forward P/E ratios for the S&P 500 to their 99th percentile historically, meaning equities have rarely, if ever, been more expensive than they are today. HY Bonds and loans offer investors the ability to continue to participate in positive sentiment while starting from much lower valuations.
Key takeaways
- The recovery in markets continued in June, but at a slower pace amid concerns over rising COVID cases.
- HY Bonds and Senior Secured Loans still ended the month up, returning 0.97% and 1.14%, respectively, capping off the best quarter for each market since Q3 2009.
- Interest rates spiked early in the month before declining slightly, and the duration-sensitive Barclays Agg returned 0.63%.
