Credit market commentary

Credit market commentary: April 2018

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

May 8, 2018 | 3 minute read

Data as of April 30, 2018 unless otherwise noted

Performance (total returns)

BenchmarksApril 2018YTD
Bloomberg Barclays U.S. Aggregate Bond Index-0.74%-2.19%
ICE BofAML U.S. High Yield Master II Index0.67%-0.25%
S&P/LSTA Leveraged Loan Index0.41%1.87%

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.

  • Thomson Reuters Lipper.

  • Bloomberg Barclays U.S. Aggregated Bond Index.

  • ICE BofAML U.S. Corporate Index.

Index descriptions: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). ICE BofAML U.S. High Yield Master II Index is designed to track the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market. S&P/LSTA Leveraged Loan Index is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market.

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This credit market commentary 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 credit market commentary 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 credit market commentary. The credit market commentary 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 credit market commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

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