Credit market commentary

Credit market commentary: December 2021

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%.

January 7, 2022 | 5 minute read

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

Performance (total returns)

BenchmarksDecember 2021YTD
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.

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site