Chart of the week

Below investment-grade markets to shine as rates rise?

As rates have risen again, our chart looks at the limited duration profile on below investment grade markets.

October 1, 2021 | 2 minute read

Breakdown of Barclays Agg total returns over time

Source: ICE BofAML U.S. Corporate Index, ICE BofAML U.S. High Yield Index, S&P/LSTA Leveraged Loan Index. Based on rolling 10-year data ended September 24, 2021. Duration measures the sensitivity of a bond’s price to changes in interest rates. Empirical duration uses historical data to calculate the observed change in a bond‘s price given changes in rates. It is calculated regressing weekly change in high yield bond index prices and weekly change in 5-year U.S. Treasury yields.

  • Treasury yields have risen sharply since the Fed adopted a more-hawkish tone at its September meeting. Since September 22, the 2-year Treasury yield has risen as much as 6 basis points while the 10-year yield jumped 22 basis points before both moderated a bit.1
  • Amid the rising rate environment, core fixed income returns have suffered. The Barclays Agg returned -0.87% in September, bringing its YTD return down to -1.55%. Over the same time, credit markets have held up relatively well. High yield bonds are flat in September while senior secured loans are up 0.64%. Year to date, they have returned 4.7% and 4.4%, respectively.2
  • The divergent paths illustrate the varying degrees of duration risk across fixed income asset classes. (As a reminder, duration measures the sensitivity of a bond’s price to changes in interest rates).
  • To this end, the chart compares stated duration to empirical, or observed, duration. Stated duration is based on a preset formula while empirical duration uses historical data to calculate a bond’s sensitivity to changes in interest rates.
  • Over the last ten years, the duration of high yield bonds and senior secured loans has been lower than investment grade corporate bonds, as most would expect.2 Looking at empirical duration tells a more complete story of their relationship to interest rates. In fact, high yield bond and senior secured loan prices increased approximately 1.4% and 2.6%, respectively, for every 100-basis point increase in interest rates over the last decade.2
  • At a time when many investors are looking to reduce or diversify their interest rate risk, below-investment-grade bonds may be particularly attractive against the backdrop of generally stable economic conditions, an uncertain interest rate outlook and expectations for the Fed to begin tapering.  

  • U.S. Treasury Department,

  • As of September 30, 2021. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index. High yield bonds represented by the ICE BofAML U.S. High Yield Index. Senior secured loans represented by the S&P/LSTA Leveraged Loan Index.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site