Credit returns amid and after rising environments
Source: J.P. Morgan Research, based on the 17 instances since May 1987 in which 5-year Treasury yields have increased 70 bps or more over a 3-month stretch. High yield bonds represented by the J.P. Morgan U.S. High Yield Index. Senior secured loans represented by the J.P. Morgan Leveraged Loan Index.
- As the 10-year U.S. Treasury yield has climbed sharply this year, longer-duration fixed income assets have suffered. The Bloomberg Barclays U.S. Aggregate Bond Index has declined -2.83% YTD while high yield bonds and senior secured loans — both shorter-duration asset classes — have fared better, returning 0.72% and 1.81%, respectively.1
- Generally, each asset class’s performance this year has been emblematic of its historical performance during periods when rates rose quickly. The chart looks at median returns across the 17 instances since 1987 when Treasury yields saw a notable spike within a 3-month period. It also shows returns in the 3-month period following the initial rate move.
- Perhaps not surprisingly, duration-sensitive bonds have seen negative returns while floating-rate senior secured loans have benefited, returning 2.2%.2
- High yield bond returns have been relatively modest but positive (under 1%) in the 3-month stretches when rates rose. But their performance during the subsequent three months has been robust as investors generally tend to focus on the positive macro drivers behind the rate increase.
- Against this backdrop, the macro environment underlying the leveraged credit markets today remains attractive as many Wall Street economists have upgraded their expectations for U.S. economic growth in 2021 to well above pre-pandemic levels. While both bonds and loans present risks, investment mandates with the flexibility to reach into lower-duration asset classes across the leveraged credit markets may provide investors with an opportunity for above-market income and differentiated returns.