Credit market commentary

Credit market commentary: August 2020

Credit markets climbed steadily higher throughout a relatively quiet August, with HY Bonds and Senior Secured Loans returning 0.98% and 1.49%, respectively. Interest rates rose throughout the month following the Fed’s inflation policy shift, sending the duration-sensitive Barclays Agg down -0.81%.

September 4, 2020 | 5 minute read

Data as of August 31, 2020 unless otherwise noted.

Performance (total returns)

BenchmarksAugust 2020YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.81%6.85%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)0.98%0.75%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.49%-1.29%

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

Leveraged credit marched steadily higher in August: Credit markets continued their upward climb in August with HY Bonds and Senior Secured Loans each posting a fifth consecutive month of gains. Bonds returned 0.98% while loans, which lagged HY Bonds in July, returned 1.49% and posted only one down day in August. Every industry in both markets posted positive performance during August and gains were driven by lower-rated assets, a sign that the recovery is becoming more broad-based. Year to date, CCC loans and bonds as well as industries most impacted by the economic fallout from the COVID-19 pandemic, such as energy and travel, continue to lag. Primary activity remained robust, bucking the typical late-summer slowdown trend. Bonds continue to be the financing source of choice in the low-rate environment, with HY issuance recording its third highest monthly volume on record. This heightened level of supply continues to be met with demand as HY funds saw a fifth consecutive month of inflows. Loan funds continue to see outflows, but August’s pace of withdrawals was much slower than during the prior four months.

Defaults and downgrades update: The virtual halt in economic activity this year has all but guaranteed rising default rates in credit markets. Both HY Bonds and Senior Secured Loans have already seen rising rates, which are currently at 10-year highs of 5.77% and 4.38%, respectively. For context, the long-term average HY and loan default rates are 3.4% and 3.0%, respectively. Defaults thus far have been heavily concentrated in sectors most impacted by the pandemic’s economic fallout and cratering oil prices. Energy companies represent roughly 30% of year-to-date defaults, with retail and gaming and leisure companies also heavily impacted. The Federal Reserve’s swift actions have been instrumental in providing capital and liquidity to companies weathering COVID-induced shutdowns, but historically default rates have tended to lag peak credit spreads by roughly one year. Spreads peaked on March 23, meaning if the typical pattern holds we are likely to see elevated levels of defaults for another 6–8 months. As a lagging indicator, however, it is not uncommon to see default rates rise coincidentally with markets. In addition to defaults, there have been elevated levels of downgrades, which have far outpaced upgrades in both HY and loans year to date. Fallen angel volume continues to rise, as $205 billion of previously investment grade rated companies have now entered the high yield market. Active managers with experience investing in a variety of complex situations should benefit from these historic dislocations across credit markets.

Key takeaways

  • Credit markets climbed steadily higher throughout a relatively quiet August, with HY Bonds and Senior Secured Loans returning 0.98% and 1.49%, respectively.
  • Interest rates rose throughout the month following the Fed’s inflation policy shift, sending the duration-sensitive Barclays Agg down -0.81%.

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