Credit market commentary

Credit market commentary: February 2019

Credit markets continued their fast start to the year, posting solid returns in February. The duration-sensitive Barclays Agg declined modestly, underperforming credit indices.

March 11, 2019 | 4 minute read

Data as of February 28, 2019 unless otherwise noted

Performance (total returns)

BenchmarksFebruary 2019YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.06%1.00%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)1.69%6.36%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.59%4.18%

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

Leveraged credit rallies in February: The leveraged credit markets continued to rebound in February, with HY Bonds off to their strongest start since 2001. Against the backdrop of rising U.S. equities, benign inflation figures and better-than-expected corporate earnings, HY Bonds returned 1.69% last month and 6.36% year to date.1 HY Bond mutual fund flows continued to reverse course from December’s record outflows, with the asset class pulling in roughly $5.6 billion in February and $10.4 billion through the first two months of 2019.2 Senior Secured Loans returned 1.59% in February, in line with HY Bonds, even as the asset class continued to experience outflows.3 However, the stretch of outflows from bank loan mutual funds began to dissipate toward month-end, with outflows declining to their lowest level in 15 weeks during the last week of February.2 Together, HY Bond and Senior Secured Loan returns easily outperformed the Barclays Agg, which returned -0.06% in February and just 1.0% so far in 2019.4

Outlook improves on more accommodative Fed: Following the heightened volatility experienced during the last part of 2018, HY Bonds and Senior Secured Loans have recovered meaningfully from their December lows. After declining to a 2.5-year low the last week of December, HY Bond and Senior Secured Loan prices ended February at a four-month high and three-month high, respectively. Spreads have also come in, with HY Bond spreads having since tightened to 4.0% from a wide point of 5.4% in December. The rally in leveraged credit has been accompanied by stable corporate fundamentals, solid U.S. economic growth, a benign corporate default environment and a dovish pivot by the Federal Reserve.5 A more accommodative Fed and recent decline in Treasury yields may lead to an improved outlook for HY Bonds and Senior Secured Loans through the remainder of the year.6 J.P. Morgan, for example, recently revised higher its 2019 forecast for HY Bond and Senior Secured Loan returns to 10.5% and 8.0%, respectively.7

Key takeaways

  • Credit markets continued their fast start to the year, posting solid returns in February.
  • The duration-sensitive Barclays Agg declined modestly, underperforming credit indices.

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

  • Thomson Reuters Lipper.

  • S&P/LSTA Leveraged Loan Index.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

  • J.P. Morgan Default Monitor, 3/1/2019.

  • St. Louis Federal Reserve,

  • J.P. Morgan High-Yield and Leveraged Loan Morning Intelligence, 3/1/2019.

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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