Credit market commentary

Credit market commentary: December 2020

Vaccine-fueled optimism drove credit markets steadily higher throughout December.

January 7, 2021 | 5 minute read

Data as of December 31, 2020, unless otherwise noted.

Performance (total returns)

BenchmarksDecember 2020YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)0.14%7.51%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)1.91%6.17%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.35%3.12%

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

Leveraged credit continued its upward march in December: Vaccine-fueled optimism sustained the broad market rally that began in November. HY Bonds and Senior Secured Loans returned 1.91% and 1.35%, respectively, and the yield on HY Bonds hit a record low. The cyclical, reflationary trade continued with the lowest-rated CCC assets leading the charge once again in both markets. On a sector basis, industries that stand to benefit the most from economic normalization and reopening, such as transportation, consumer products and broadcasting, which has exposure to companies that produce live events, were among top performers. High yield bond funds saw slight net outflows in December but, in a reversal of the multiyear trend, senior secured loan funds had four consecutive weeks of inflows. As Treasury rates have edged higher in recent months, demand for floating rate assets has been reignited. On the new issuance side, companies eager to lock in record-low rates continued to issue debt at a swift pace, and full-year HY issuance totaled a record $450 billion. Default rates, which had declined in recent months, ticked up slightly to 6.17% in the HY market and 3.95% for loans. The duration-sensitive Barclays Agg returned 0.14%, as rates were relatively rangebound throughout the month.

Credit proved resilient throughout 2020: Credit markets proved their resiliency once again throughout 2020 as HY Bonds and Senior Secured Loans staged a remarkable recovery – with few setbacks – following the market rout in March. Spreads ended the year only moderately higher than where they began and fundamentals such as default rates, leverage and EBITDA growth, which unsurprisingly have not fully recovered, are trending in the right direction. The question is: Where does credit go from here? A solid economic backdrop, downward trending default rates, the likelihood of widespread vaccine distribution, and continued implicit Federal Reserve support should all create a conducive environment for credit for much of 2021. Plus, though the rally broadened in November, lower-rated assets and those in cyclical sectors such as transportation, broadcasting and energy have still not fully recovered. Structured products present a compelling area of opportunity as well. CLOs returned 3.1% last year but are still trading wide to comparably rated corporate bonds, suggesting potential for further spread compression. Their relatively higher yield also offers an attractive opportunity for income-seeking investors. Still, risks remain. COVID case counts continue to rise, prompting further lockdowns and restrictions, and mass immunization is months away. Active managers with flexible, dynamic strategies will likely be best positioned to navigate the current market and take advantage of any potential near-term volatility.

Key takeaways

  • Vaccine-fueled optimism drove credit markets steadily higher throughout December.
  • HY Bonds returned 1.91% while Senior Secured Loans were up 1.35%.
  • The duration-sensitive Barclays Agg returned 0.14% as rates remained relatively rangebound all month.

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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