Credit market commentary

Credit market commentary: August 2022

Credit markets were mixed last month. High yield built on its July rally in the first half of the month before surrendering those gains, ending August down -2.83%. Floating rate senior secured loans ended August up 1.54%.

September 12, 2022

Data as of August 31, 2022, unless otherwise noted.

Performance (total returns)

BenchmarksAugust 2022YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)-2.83%-10.75%
ICE BofAML U.S. High Yield Index (HY Bonds)-2.38%11.04%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.54%-1.01%

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 August: Credit markets were mixed last month. High yield built on its July rally in the first half of the month, as strong earnings and economic data alleviated recession concerns slightly. The asset class surrendered those gains over the back half of the month, ending August down -2.38%, as hawkish Fed rhetoric and rising rates weighed broadly on fixed rate markets. Floating rate senior secured loans ended August up 1.54%. In a sign that recession fears took a back seat to concerns over rising interest rates in August, the highest rated, most duration sensitive BB bonds led the declines. CCC bonds remained positive on the month but are still the weakest performing cohort in the high yield market year to date. The 10-year U.S. Treasury yield rose for much of the month, ending August at 3.19%. This weighed on the duration-sensitive Bloomberg Aggregate Bond Index, which declined -2.83%. New primary market credit issuance remained slow. $8.1 billion of high yield bonds were issued last month, the slowest August since 2014. The loan market remained largely shuttered as well, with just over $12 billion of loans issued. On a year-over-year basis, high yield bond issuance is down 78% compared to the same period in 2021 while loan issuance is 67% lower. High yield bond fund outflows resumed in August after July’s inflows. The loan market also saw outflows, the fourth consecutive month the asset class has lost retail dollars.

Market rating trends have diverged: Ratings trends have diverged in recent months between high yield bonds and loans. The bond market continues to improve in quality, with ratings upgrades outpacing downgrades, while the reverse is true in loans, which saw downgrades outpace upgrades for the fourth consecutive month. While this trend is not particularly worrisome in the current environment, we continue to monitor the loan market, which has declined in quality based on ratings composition versus the high yield market in recent years. Default rates remain low, at just 1.20% and 1.25% for high yield and loans, respectively, and levels of distress do not indicate substantial changes to the current default environment. Still, we remain cognizant of the fact that should credit fundamentals or economic data deteriorate substantially, loans could struggle on a relative basis more than high yield bonds. We recommend an active, selective approach and robust fundamental analysis in the loan market.

Key takeaways

  • Credit markets were mixed last month. High yield built on its July rally in the first half of the month before surrendering those gains, ending August down -2.83%. Floating rate senior secured loans ended August up 1.54%.
  • Rising long-term interest rates pressured the duration sensitive Bloomberg Agg, which fell -2.83%.
  • Ratings trends have diverged in recent months, as more high yield bonds have been upgraded than downgraded while the reverse is true in loan markets. We continue to monitor this given the divergence in quality between the two markets in recent years.

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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