Data as of December 31, 2021, unless otherwise noted.
Performance (total returns)
| Benchmarks | December 2021 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | -0.26% | -1.54% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 1.88% | 5.36% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 0.64% | 5.20% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets rise in December: After declining for two consecutive months, high yield bonds ended the year with their strongest monthly return, up 1.88% in December. Senior secured loans also rose, up 0.64%. Markets overlooked the surge in COVID cases due to the Omicron variant, rallying for much of the month. High yield bond spreads tightened 47 basis points, ending the year at post-Global Financial Crisis (GFC) tights. Loan spreads tightened slightly but remain wide of post-GFC levels. The Fed announced that it would double the pace of its taper, opening the door for near-term rate hikes to combat rising inflation. Yields rose across the curve on this hawkish pivot, sending duration sensitive assets like the Barclays Agg down. The Agg returned -0.26% in December and -1.54% for the year, its worst annual performance since 2013. Default activity remained benign, with only one loan default in December. The Trailing Twelve Month (TTM) default rate ended the year at 0.29% in the high yield market, which is this market’s lowest recorded level. The TTM rate in the loan market fell to 0.65%, the lowest level since 2011. 2021 posted the lowest default volume since 2007, and levels of distress in the market remain negligible, signaling few changes to the current low default environment.
Bonds eek out gain over loans in 2021: Performance leadership oscillated between high yield bonds and senior secured loans for much of the year. Throughout 2021, loans benefited from a supportive technical backdrop with strong retail inflows and robust CLO formation. A risk-on rally in December, however, gave bonds a slight edge over loans on a full year basis, but the performance gap between the two markets was the smallest since 2007. Bonds returned 5.36% in 2021 while loans were up 5.20%. Since 2000, on an annual basis, senior secured loans have only outperformed high yield bonds once in years in which the HY market was positive. We think loans could add another tally to that figure in 2022. High yield bond spreads sit at post-GFC tights, and while they could tighten somewhat further, December’s rally likely borrowed from some of 2022’s potential gains. Loans have a relatively higher starting spread level and only 27% of the asset class trades at par, leaving room for potential price gains. Plus, with the Fed likely on the precipice of a hiking cycle, we believe loans should be particularly en vogue in 2022.
Key takeaways
- Credit markets were positive in December. After two straight monthly declines, HY bonds posted their best month of the year, up 1.88%, while loans returned 0.64%.
- Default activity remained benign, with only one new default. The TTM HY bond default rate hit a record low, of 0.29%, while the 0.65% rate in the loan market is a low since 2011. On a full year basis, 2021 had the lowest default volume since 2007.
- Bonds eked out a gain over loans in 2021. That may change next year.
