Credit market commentary

Credit market commentary: April 2021

The duration-sensitive Barclays Agg posted its first positive return of the year in April as long-term interest rates drifted lower.

May 5, 2021 | 5 minute read

Data as of April 30, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksApril 2021YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.79%-2.61%
ICE BofAML U.S. High Yield Index (HY Bonds)1.10%2.01%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.51%2.30%

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

Credit resumes rally in April: HY Bonds and Senior Secured Loans continued their rally in April after stalling for much of March. Returns were generally solid across markets last month, with most major asset classes posting gains amid robust corporate earnings and strong economic data. HY Bonds returned 1.10%, their best month this year, outperforming Senior Secured Loans, which were up 0.51%. CCC rated bonds once again outperformed, returning 1.33%. However, in a reversal of the year-to-date trend, BB rated bonds beat B rated issues as declining long-term interest rates boosted the most duration-sensitive part of the high yield market. Performance in the loan market continues to be dominated by the highest-yielding issues as CCCs and second-lien loans once again outperformed. Default rates declined significantly last month, as many of the large defaults that occurred during the height of the economic shutdowns in March 2020 rolled out of the trailing 12-month calculation. Both markets continue to trend toward the 2% year-end rate that is forecast by many market participants. The HY bond default rate currently stands at 3.17% while the rate in the loan market is 2.25%. Long-term interest rates trended lower throughout the month, lifting the duration-sensitive Barclays Agg, which posted its first positive return of the year.

Getting technical: Credit market fundamentals continue to improve alongside a very upbeat economic outlook. Default rates are trending lower and corporate earnings were strong in Q1, which should lead to improvements in leverage levels and interest coverage statistics. While fundamentals are improving, we believe technical conditions in credit markets will potentially have a larger impact on the asset class for the remainder of the year. Companies continue to issue debt at record levels, capitalizing on still-historically low interest rates. For the first time this year, however, demand outstripped supply in the HY bond market despite another month of strong issuance. Mutual fund flows turned positive after outflows characterized much of Q1 amid rising long-term interest rates. A dearth of fallen angels and increase in rising stars have contributed to this strong demand. The loan market also continues to issue debt at a record pace, which has been met by solid demand from both retail and institutional investor bases. Retail fund flows turned positive this year for the first time since 2018 as long-term interest rates rose. These inflows slowed somewhat in April as interest rates declined, but CLO issuance continued to be a steady source of demand in the loan market. The search for yield remains paramount for most investors, and we think that strong demand will continue in both high yield bond and loan markets.

Key takeaways

  • Strong economic data and robust corporate earnings boosted most major asset classes in April.
  • Credit markets continued their rally in April after stalling for much of March, with HY Bonds outperforming Senior Secured Loans.
  • The duration-sensitive Barclays Agg posted its first positive return of the year in April as long-term interest rates drifted lower.

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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