Credit market commentary

Credit market commentary: April 2022

Markets continued to grapple with volatility in April, as rising interest rates and broader macroeconomic uncertainty sent most major asset classes sharply lower.

May 6, 2022

Data as of April 30, 2022, unless otherwise noted.

Performance (total returns)

BenchmarksApril 2022YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)-3.79%-9.50%
ICE BofAML U.S. High Yield Index (HY Bonds)-3.64%-7.99%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.22%0.11%

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

Credit markets mixed in April: Markets continued to grapple with volatility in April, as rising interest rates and broader macroeconomic uncertainty sent most major asset classes sharply lower. The S&P 500 lost -8.72% while high yield bonds declined -3.64%, the second largest monthly decline for the HY Index since the Global Financial Crisis. Senior secured loans continued to benefit from their floating rate coupon, returning 0.22%. Bucking the year-to-date trend, CCC-rated bonds underperformed BB bonds in April, but on a year-to-date basis, duration-sensitive BB bonds have still suffered most. 10-year U.S. Treasury yields climbed once again in April, ending the month just below 3%, levels not seen since 2018. Core fixed income continues to suffer in this environment; the Bloomberg Agg was down -3.79% last month, its worst month since February 1980, and year-to-date declines of -9.50% have already eclipsed the index’s worst annual return on record. Despite a slight uptick in the number of loan defaults last month, by volume the Trailing 12-Month (TTM) default rate declined slightly, ending at 0.48% and 0.85% in high yield and loans, respectively.

Supply/demand update:  Year to date, senior secured loans are down -0.10%, significantly outperforming high yield bonds which are down -4.51%. This performance dynamic is relatively unsurprising, as the floating rate nature of the loan asset class has made it less exposed to rising interest rates. However, the degree of outperformance by loans is, in our view, unlikely to continue at this rate. The average performance gap on an annual basis between the two markets is 2.15%, with high yield outperforming loans in 18 of the past 25 years. Loans are currently beating bonds by 4.41%, suggesting room for high yield to outperform in the coming quarters. The divergence in performance to-date has also caused the relative attractiveness of high yield bonds versus loans, as evidenced by the carry differential (difference in yield to maturities, not accounting for future rate increases, between the two asset classes), to rise to multi-year highs. Plus, given recent moves, high yield now yields 6.2%, up from just under 4% last year, marking the highest level of yield since July 2020.This dynamic will be one to watch in the coming quarters.

Key takeaways

  • Credit markets were mixed in April. High yield bonds lost -3.64%, their second worst month since the Global Financial Crisis. Loans continue to benefit from their floating rate coupon, returning 0.22% last month.
  • Rising long-term rates have pressured duration sensitive asset classes all year. The Bloomberg Agg lost -3.79% in April and is down -9.5% year to date, tripling its worst annual loss on record.
  • Both high yield bond and senior secured loan markets have experienced slight supply deficits this year, although the underlying drivers of these technical dynamics differs.

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.

The indexes referenced herein are the exclusive property of each respective index provider and have been licensed for use by FS Investments. The index providers do not guarantee the accuracy and/or completeness of the indexes and accept no liability in connection with the use, accuracy, or completeness of the data included therein. Inclusion of the indexes in these materials does not imply that the index providers endorse or express any opinion in respect of FS Investments. Visit for more information.

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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