Credit market commentary

Credit market commentary: December 2022

Credit market performance diverged in December. High yield bonds started the month higher on optimism that inflation may be cooling before hawkish Fed rhetoric weighed on the asset class over the latter half of December.

January 9, 2023

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

Performance (total returns)

BenchmarksDecember 2022YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)-0.45%-13.01%
ICE BofAML U.S. High Yield Index (HY Bonds)-0.75%-11.22%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.44%-0.60%

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

Credit markets diverged in December: Credit market performance diverged in December. High yield bonds started the month higher on optimism that inflation may be cooling before hawkish Fed rhetoric weighed on the asset class over the latter half of December. Bonds ended the month down -0.75%. Loans rose for much of the month, returning 0.44% in December as expectations of a higher terminal Fed Funds rate buoyed the floating rate asset class. The primary market remained slow in both markets last month, with just $2.3 billion of bonds and $16.5 billion of loans issued. Compared to the full year 2021, high yield bond and senior secured loan issuance was down 78% and 70%, respectively. After strong inflows in November, high yield bond funds saw retail outflows in December while investors continued to shun the loan market, which has now had eight consecutive monthly outflows. There were no defaults in December for the third straight month; however, there were three distressed exchanges impacting both bonds and loans. The trailing 12-month default rate ended 2022 at 1.65% for high yield bonds and 1.59% for senior secured loans, above the near-record low levels that began the year, but well below long-term averages in each market of 3.2% and 3.1% for bonds and loans, respectively.

2022 in review: 2022 was a tumultuous year, one that saw concerns over rising rates, inflation, an ultra-hawkish Fed, geopolitical uncertainty and concerns over economic growth roil global markets. Credit market performance diverged for much of the year. When concerns over rising rates dominated, floating rate loans led and relatively more-duration sensitive bonds declined. During periods when recession fears were at the fore investors showed a clear preference for quality, with high yield bonds outperforming loans which, by ratings-composition is a lower quality market. Ultimately, high yield bonds ended the year down -11.22% while loans were down just -0.60%. Despite these index level declines, credit markets enter 2023 with supportive fundamentals. Defaults remain subdued, leverage levels are near record lows and interest coverage stats show that companies are servicing their debt with ease. While uncertainties remain, we believe that given the strong fundamental starting point, credit markets are relatively well positioned to navigate the year ahead, including a potential slowdown in economic growth.

Key takeaways

  • Credit market performance diverged last month; high yield bonds lost -0.75% while floating rate senior secured loans gained 0.44%.
  • 2022 was a tumultuous year in financial markets. High yield bonds ended the year down -11.22% while loans were down -0.60%. Despite volatility and headline declines, credit markets enter 2023 with supportive fundamentals.

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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