Credit market commentary

Credit market commentary: December 2018

Amidst broad market volatility and record outflows, HY Bonds and Senior Secured Loans fell in December. 10-year Treasury rates fell as investors sought safety in government bonds.

January 11, 2019 | 4 minute read

Data as of December 31, 2018 unless otherwise noted

Performance (total returns)

BenchmarksDecember 2018YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)1.84%0.01%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)-2.19%-2.26%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)-2.54%0.44%

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

Leveraged credit declines amid December volatility: U.S. equity and commodity price volatility negatively impacted the leveraged credit markets in December, with HY Bonds posting their largest quarterly decline in three years. Against the backdrop of heightened market volatility stemming from global growth and trade-related concerns, HY Bonds returned -2.19% last month, the worst monthly return since November 2015, capping the asset class’s first annual decline since 2015.1 Investors withdrew approximately $6.8 billion from high yield bond mutual funds in December even as corporate fundamentals remained stable and corporate default rates remained near historic low levels.2,3 Senior Secured Loans returned -2.54% in December, the worst monthly return since August 2011, as bank loan mutual funds registered their first quarterly outflow in a year after posting the largest-ever weekly outflow in the last week of December.2,4 Nevertheless, Senior Secured Loan returns remained positive for 2018, outperforming both HY Bonds and higher-duration fixed income investments. For perspective, the Barclays Agg returned 1.84% in December but only 0.01% for all of 2018 due, in part, to the index’s higher sensitivity to interest rates.5

Treasury yields decline on global growth concerns: HY Bonds and Senior Secured Loans experienced their third straight monthly decline as heightened risk aversion and extreme U.S. equity price swings weighed on most global asset classes. The yield on the 10-year Treasury note declined to below 2.7% at month-end as a mix of trade-related and global growth concerns had investors seeking safety in Treasuries.6 The shift in sentiment was reflected by HY Bond and Senior Secured Loan prices, which declined to 2.5-year lows in the last week of December.1,4 Notably, both HY Bond spreads and Senior Secured Loan spreads are now wider than their average since 2011. For context, over the past 30 years, HY Bond spreads have begun a month at 5.0% or higher 55% of the time and have returned, on average, 11.2% over the following 12 months.7 At the same time, corporate default rates remain near historic lows, with high yield bond and senior secured loan default rates ending December at 1.81% and 1.63%, respectively.8

Key takeaways

  • Amid broad market volatility and record outflows, HY Bonds and Senior Secured Loans fell in December.
  • 10-year Treasury rates fell as investors sought safety in government bonds.

  • ICE BofAML U.S. High Yield Master II Index.

  • Thomson Reuters Lipper.

  • S&P Leveraged Commentary & Data.

  • S&P/LSTA Leveraged Loan Index.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

  • St. Louis Federal Reserve,

  • J.P. Morgan High Yield and Leveraged Loan Morning Intelligence, 12/11/18.

  • J.P. Morgan Default Monitor, 1/2/19.

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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