Credit market commentary

Credit market commentary: April 2023

Following an extraordinarily volatile March, credit markets turned higher amid the more settled macro environment.

May 12, 2023

Data as of April 30, 2023, unless otherwise noted.

Performance (total returns)

BenchmarksApril 2023YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)0.61%3.59%
ICE BofAML U.S. High Yield Index (HY Bonds)0.93%4.58%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.05%4.26%

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

Risk assets outperformed in April: Following an extraordinarily volatile March, the Merrill Lynch Option Volatility Estimate (MOVE) Index declined throughout April as the 2- and 10-year Treasury yields were generally flat to lower by month end. Credit markets turned higher amid the more settled macro environment. Senior secured loans returned 1.05% while high yield bonds returned 0.93%. Amid a solid macro backdrop featuring relatively healthy fundamentals among high yield issuers, lower-rated assets again outperformed in April. CCC loans returned 1.48% compared to 0.86% and 1.15% for BB and B loans, respectively. The delta was wider among bonds as CCC bonds returned 1.93% and BB bonds returned 0.67%. Year to date through April, CCC bonds are outperforming BB bonds by 322 bps and CCC loans are outperforming BB loans by 197 bps. Treasury yields bounced around in April, driven by conflicting signals on economic growth. The 2-year Treasury yield ultimately finished the month flat compared to March, at 4.06% while the 10-year Treasury yields finished April -4 basis points lower. Against this backdrop, the Bloomberg Agg returned 0.61%. The 10- and 2-year Treasury curve inversion also remained relatively unchanged on the month, at approximately -60 basis points. High yield issuance picked up significantly in April as the market reopened after having effectively closed for much of March. HY issuance totaled $18.8 billion compared to just $5.6 billion a month earlier. Loan issuance picked up in late April and totaled $19.0 billion over the month, up slightly versus the $17.4 billion of loans issued in March. High yield bond funds saw inflows of nearly $7.7 billion in April, which marked their first monthly inflow this year as retail demand recovered. On the other hand, demand for loan funds continued to be weak throughout April. The loan asset class has experienced outflows in 35 of the past 36 weeks, totaling over -$26.8 billion in outflows over that period. Default activity accelerated in April, with four defaults and two distressed exchanges. High yield bonds’ trailing 12-month default rate including distressed exchanges, rose 27 basis points month over month (MoM) in April to 2.18% while senior secured loans rose 51 basis points to 2.74%. While the default rate rose for both markets, they remain below the long-term average of 3.2% and 3.1% for high yield bonds and senior secured loans, respectively.

Credit performed well after previous Fed pauses: Just after month-end, the Fed raised rates 25 bps and is now expected to pause following a full 500 bps of rate hikes for this cycle. Credit has generated solid returns across the five periods over the past 30 years where the Fed paused after a series of rate hikes. High yield bonds and senior secured loans have averaged 12.30% and 7.51%, respectively, in the 12-month period following a Fed rate.1 While each period was unique, credit markets generally benefited from higher yields as a result of the Fed’s rate hikes and improved sentiment as investors began to price in potential rate cuts. On average, spreads on high yield bonds tightened -26 basis points in the subsequent 12-month period.1

Key takeaways

  • Following an extraordinarily volatile March, credit markets turned higher amid the more settled macro environment. Senior secured loans led the way, returning 1.05% while high yield bonds returned 0.93% in April. Amid improved sentiment, CCC securities outperformed higher-rated BB assets during the month. 
  • With the Fed likely on hold following its latest rate hike, credit has historically performed well in other past instances following a pause in Fed rate hikes. High yield bonds and senior secured loans have averaged 12.30% and 7.51%, respectively, in the 12-month period following a Fed rate.1

  • J.P. Morgan High Yield and Leveraged Loan Morning Intelligence, April 27, 2023. Data show returns in the periods following rate hikes from February 1995 through December 2018.

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site