Credit market commentary: April 2018

Data as of April 30, 2018 unless otherwise noted

Performance (total returns)

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Positive month for high yield bonds and senior secured loans: High yield bonds and senior secured loans posted positive returns in April. For the ICE BofAML U.S. High Yield Master II Index (HY Bonds), this was the first positive monthly return since January as the market has mimicked the risk-on/risk-off trades in the S&P 500 Index this year. Investor fund flows also supported returns in April, as high yield bond funds recorded a modest inflow of $898 million, slightly reducing the year-to-date outflow to $18.9 billion.¹ The S&P/LSTA Leveraged Loan Index (senior secured loans) posted its eighth straight month of positive returns, although it underperformed HY Bonds for the first time in six months. Senior secured loans remain one of the few fixed income investments generating positive returns in 2018. For perspective, the Bloomberg Barclays U.S. Aggregate Bond Index (the Barclays Agg) returned -0.74% in April and has now generated only one positive monthly return over the past three months due, in part, to the benchmark’s higher sensitivity to rising interest rates.²

Treasury rates move past 3%: On April 25, the 10-year U.S. government Treasury bond hit a yield of 3.03%, the highest level since January 2014. While market pundits may debate the psychological significance of breaching the 3% barrier, the impact on interest rate-sensitive fixed income assets is easier to observe. As the yield on the U.S. 10-year Treasury note rose nearly 25 bps in April and is now up approximately 60 bps since the beginning of the year, fixed income asset classes with higher durations are feeling the brunt of the move. Not only is the Barclays Agg, a proxy for broader fixed income, down on the year, but investment grade U.S. corporate bonds are down 3% year to date as well.³ Given that higher-duration asset classes tend to have lower current yields, the impact on the long-term historical returns of these indexes can be material if rates continue to move higher. The 1-, 3- and 5-year annualized returns for the Barclays Agg are now -0.32%, 0.95% and 1.46%, respectively. The high yield bond and senior secured loan asset classes, both of which have lower duration on average than the Barclays Agg, or investment grade bonds, have fared better.

Key takeaway

As interest rates rose, high yield bonds and senior secured loans outperformed more duration-sensitive asset classes.