Credit market commentary: April 2019

Data as of April 30, 2019 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.

Leveraged credit rises in April: The leveraged credit markets rose in April, with Senior Secured Loans outperforming HY Bonds for the first time in five months. HY Bonds continued their strong start to the year amid record-high equity prices, relatively stable U.S. Treasury yields and solid corporate fundamentals, returning 1.40% last month and 8.90% year to date.¹ A more accommodative Federal Reserve and dramatically reduced odds of a near-term rate hike are, in part, responsible for steady inflows into high yield bond mutual funds in 2019. In a reversal from December’s record outflows, high yield bond mutual funds pulled in roughly $3.2 billion in April and $15.2 billion through the first four months of the year.² Senior Secured Loans returned 1.65% in April, outperforming HY Bonds for the first time since November, even as outflows from bank loan mutual funds persisted.³ However, the stretch of outflows from bank loan mutual funds began to dissipate toward month’s end, with outflows declining to their lowest level in nine weeks the last week of April.² More broadly, the Barclays Agg eked out just a small gain in April as 10-year Treasury rates rose and investors appeared more willing to take on additional credit risk in exchange for the higher yields offered by other fixed income investments.⁴

Leveraged credit yields tighten, loans trade tight to high yield: Following the heightened volatility experienced during the last part of 2018, HY Bonds and Senior Secured Loans have recovered meaningfully so far in 2019. Amid a steep rise in prices, Senior Secured Loan yields and HY Bond yields have tightened significantly from the highs of last December. But yields on HY Bonds have declined more dramatically than those of Senior Secured Loans as floating rate coupons have become less appealing following a dovish pivot by the Fed. This has led to an unusual market dynamic in which the spread between HY Bond yields and Senior Secured Loan yields is unusually tight. It is uncommon for Senior Secured Loan yields to exceed those of HY Bonds but, by at least one measure, bond yields were sitting below loan yields for most of April. By month’s end, Senior Secured Loans yielded 6.49%, while HY Bonds yielded 6.52%. This is abnormally tight given Senior Secured Loans’ seniority in the corporate capital structure. For perspective, at the beginning of the year Senior Secured Loans yielded 7.23% and HY Bonds yielded 8.01% – a yield differential closer to the historic norm.^5,6

Key takeaway

Senior Secured Loans and HY Bonds rose amid strong returns for equities while the Barclays Agg was roughly flat as 10-year Treasury rates increased modestly.