Credit market commentary

Credit market commentary: April 2019

Leveraged credit rises in April | Leveraged credit yields tighten, loans trade tight to high yield

May 6, 2019 | 4 minute read

Data as of April 30, 2019 unless otherwise noted

Performance (total returns)

BenchmarksApril 2019YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)0.03%2.97%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)1.40%8.90%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.65%5.71%

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.

  • ICE BofAML U.S. High Yield Master II Index.

  • Thomson Reuters Lipper.

  • S&P/LSTA Leveraged Loan Index.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

  • S&P/LSTA Leveraged Loan Index, yield-to-maturity.

  • ICE BofAML U.S. High Yield Master II Index, yield-to-maturity.

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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