Chart of the week

Credit performed well after previous Fed pauses

With the Fed potentially pausing after a May rate hike, this week’s chart looks at credit returns after historical pauses in Fed rate hiking cycles.

April 28, 2023 | 2 minute read

Credit returns following a Fed rate pause

Source: J.P. Morgan High Yield and Leveraged Loan Morning Intelligence, April 27, 2023. Data show returns in the periods following rate hikes from February 1995 through December 2018. Past performance is no guarantee of future results.

  • Another round of bank stress, this time at First Republic Bank, sent Treasury yields lower this week. Additional bank uncertainty also increased the likelihood the Fed will raise rates just once more before pausing.
  • Against this backdrop, this week’s chart looks at credit returns across the five periods over the past 30 years where the Fed paused following a series of rate hikes.
  • As it shows, both high yield bond and senior secured loans generated competitive average returns in the periods just after the Fed paused.1 For high yield bonds, the strongest return (+14.08%) came in the 12 months after the December 2018 hike while the lowest (+3.33%) followed the May 2000 hike.1
  • Each period was unique, but credit markets generally benefited from higher yields as a result of the Fed’s rate hikes and improved sentiment as investors began to price in potential rate cuts. On average, spreads on high yield bonds tightened -26 basis points in the subsequent 12-month period. 1  
  • Yields and spreads across the high yield bond and senior secured loan markets have recently tightened from their highs of mid-March but remain elevated compared to the beginning of the year. When combined with a slowing-but-solid fundamental backdrop, today’s market may provide a potentially attractive starting point should the Fed indeed pause following a May rate hike. 

  • J.P. Morgan High Yield and Leveraged Loan Morning Intelligence, April 27, 2023. Data show returns in the periods following rate hikes from February 1995 through December 2018. Past performance is no guarantee of future results.

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