Credit market commentary

Credit market commentary: August 2021

The duration-sensitive Barclays Agg was negative in August as long-term interest rates rose slightly.

September 2, 2021 | 5 minute read

Data as of August 31, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksAugust 2021YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.19%-0.69%
ICE BofAML U.S. High Yield Index (HY Bonds)0.55%4.64%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.47%3.76%

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

Credit markets positive in August: High yield bonds and senior secured loans were positive in August after posting mixed returns in July. Spreads in both markets continued to drift wider over the first three weeks of the month as concerns about the delta variant created a slight risk off tone in markets. Industries that were most impacted by COVID last year such as energy, broadcasting (which has exposure to live events), and gaming, lodging and leisure experienced the most spread widening in late July and early August. After hitting their widest level since mid-May, spreads declined sharply during the last week of the month as reassurances that the Fed would not imminently raise rates outweighed lingering virus-related concerns. Ultimately, high yield bonds returned 0.55% while loans were up 0.47%. After underperforming in July, CCC-rated bonds and loans outperformed their higher-rated counterparts in August. The default environment remains benign with just one loan default last month. The Trailing Twelve Month (TTM) default rates fell to 1.14% in high yield and 1.07% in loans, and 2021 is on track to have the lightest default levels since 2007. Long-term interest rates rose slightly last month, hurting duration-sensitive assets such as the Barclays Agg, which was down -0.19%. The Agg remains down -0.69% on a year-to-date basis.

Credit markets perform well following heightened issuance: A major storyline in credit for much of the past 15 months has been the extremely active primary market. New issuance has totaled $364 billion in the high yield market thus far in 2021, and monthly issuance records have been set five times this year. We’ve noted previously the opportunity we see in new issuances; new issues have historically performed well and carry a yield premium averaging 43 basis points. Invariably, the question is raised about overall market performance during these times of heightened issuance. Data shows that concerns of excess supply weighing on the technical picture in markets may be overblown, and that high yield performance during times of heavy issuance is often above the norm. In the 25 months since 2010 when HY issuance has been greater than $40bn, the market has returned an average of 0.74% versus the overall HY market average monthly return of 0.63%. Returns have been negative during only five of those 25 months. The contrapositive is true as well. High yield performance is generally lower during periods of light issuance. HY returns have been -0.99% on average during months when bond issuance has been less than $15bn.

Key takeaways

  • Credit markets were positive in August. HY bonds returned +0.55% while loans were up 0.47%.
  • The duration-sensitive Barclays Agg was negative in August as long-term interest rates rose slightly.
  • Data shows that HY bond performance is above average during periods of heavy issuance.

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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