Credit market commentary

Credit market commentary: February 2018

Investments with lower durations, such as senior secured loans, have outperformed so far in 2018 and may display lower levels of volatility if U.S. Treasury yields rise further.

March 12, 2018 | 4 minute read

Data as of February 28, 2018, unless otherwise noted

Performance (total returns)

BenchmarksFebruary 2018YTD
Bloomberg Barclays U.S. Aggregate Bond Index-0.95%-2.10%
ICE BofAML U.S. High Yield Index-0.93%-0.30%
S&P LSTA Leveraged Loan Index0.20%1.16%

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

Corporate credit benchmarks were mixed in February, with senior secured loans posting a modest gain while high yield bonds and the broader fixed-rate bond market posted modest to moderate declines. Against the backdrop of rising U.S. government bond yields and a volatile month for U.S. equities, floating rate and other low-duration investments benefited alongside renewed investor attention to rising interest rates.

High yield bonds slip: High yield bonds returned -0.93% in February, the largest decline in 26 months, erasing all the gains of January.1 Amid emerging interest rate concerns and a spike in equity volatility, high yield bond mutual funds recorded an outflow of approximately $10.4 billion in February after posting their second-largest weekly outflow ever during the week ended February 14.2 Alongside increased volatility in U.S. 10-year Treasury yields, high yield bond prices declined $1.55 and high yield bond yields widened by approximately 43 bps to 6.16% as of February 28.1,3,4 For perspective, high yield bond yields were sitting at a 2017 low of 5.37% in October. Against the backdrop of a sell-off in U.S. Treasuries, the higher-yielding areas of the bond market held up slightly better than their lower-yielding peers. In February, BB rated bonds generated a total return of -1.16%.5 By comparison, B rated and CCC rated bonds provided total returns of -0.77% and -0.59%, respectively, in February.6,7

Senior secured loans benefit from rate rises: While last month’s decline in high yield bond prices weighed slightly on the senior secured loan market, the asset class recorded a modest gain of 0.20% in February and remains one of the few fixed income investments providing a positive return in 2018.8 Benefiting from their floating rate coupon and position as a potential hedge against rising interest rates, senior secured loan prices have continued to appreciate since the outset of 2018 even as bond prices declined.8 For context, senior secured loan prices are up $0.48 since December 31, 2017, as increased interest rate concerns raised the appeal of the asset class, versus a $1.23 decline in high yield bond prices and a $3.34 decline in investment grade corporate bond prices.1,8,9 Year to date, senior secured loans are now providing returns of 1.16% after returning 4.12% in 2017.8 By comparison, high yield bonds, U.S. 10-year Treasuries and the broader fixed-rate bond market are providing a year-to-date return of -0.30%, -3.65% and -2.09%, respectively.1,10,11

Key takeaway

Benefiting from their floating rate coupon and position as a potential hedge against rising interest rates, senior secured loans remained relatively steady in the face of rising U.S. Treasury yields and increased equity volatility. Investments with lower durations, such as senior secured loans, have outperformed so far in 2018 and may display lower levels of volatility if U.S. Treasury yields rise further.

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

  • Thomson Reuters Lipper.

  • Federal Reserve Bank of St. Louis, 10-year yield,

  • ICE BofAML U.S. High Yield Master II Index (yield-to-worst).

  • ICE BofAML U.S. High Yield BB Rated Index.

  • ICE BofAML U.S. High Yield B Rated Index.

  • ICE BofAML U.S. High Yield CCC & Lower Rated Index.

  • S&P/LSTA Leveraged Loan Index.

  • ICE BofAML U.S. Corporate Master Index.

  • ICE BofAML U.S. 10-year Treasury Index.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

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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