Data as of February 28, 2021, unless otherwise noted.
Performance (total returns)
| Benchmarks | February 2021 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | -1.44% | -2.15% |
| ICE BofAML U.S. High Yield Master II Index (HY Bonds) | 0.35% | 0.73% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 0.59% | 1.78% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Leveraged credit continued upward climb in February: HY Bonds and Senior Secured Loans each continued their upward climbs during February, with loans outperforming bonds slightly as longer-dated Treasury rates surged, weighing on sentiment. HY Bonds had a strong start to the month, up over 1% before giving back more than half the gains over the last two weeks alongside equity market weakness, finishing up 0.35% for the month. Loan prices remained solid amid the rate spike, and the asset class returned 0.59% during February. Performance in both markets was driven by CCC rated assets, which are now outperforming BBs in HY and loans by nearly 400 and 430 bps, respectively. On the technical front, new HY issuance remained robust, with 2021 volumes up 33% year over year as issuers look to lock in liquidity at ultra-low rates. HY fund outflows continued while loan funds have had eight consecutive weeks of inflows, accounting for roughly 12.7% of the asset class’s AUM. There were two defaults last month, leaving the TTM rates at 6.63% for bonds and 3.98% for loans. Ratings upgrades in both markets this year have far outpaced downgrades, a stark turnaround from last year’s record pace of downgrades. The spike in long-term interest rates sent the duration-sensitive Barclays Agg sharply lower, down -1.44% in February.
Credit markets tested by rising rates: Long-term Treasury yields have risen steadily in recent months, but the sharp rate-spike in late February has brought duration concerns squarely back in focus. Equity markets broadly sold off over the last two weeks of the month and HY Bonds traded down slightly in sympathy. Notably, HY lost only 70 bps over that two-week period while equities were down -3.06%. This moderate correlation does not surprise us, as a general “risk-off” sentiment was apparent. While investors often flock to floating rate products like Senior Secured Loans during periods of rising rates, history tells us that in the longer run, HY Bonds are also relatively rate insensitive. Credit investments are most impacted by company-specific fundamentals and general economic conditions. As rising rates often accompany periods of economic strength or expansion, issuers are better able to meet their financial obligations, default risks decrease, and risk premia (spreads) compress. The empirical (i.e., actual, historical) duration of HY Bonds is -1.5, meaning that for every 100 bps increase in interest rates, HY Bond prices can actually be expected to increase 1.5%; for loans, that number is -2.5. Should rates continue to rise this year, we believe both HY Bonds and Senior Secured Loans are attractive options for investors looking to reduce duration sensitivity while retaining above market levels of income.
Key takeaways
- Both HY Bonds and Senior Secured Loans posted positive returns.
- Bonds were tested by a sharp interest rate spike and declined slightly alongside equities over the last two weeks of February but remained positive on the month, returning 0.35%. Loan prices remained firm, as the asset class outperformed bonds, returning 0.59%.
- The duration-sensitive Barclays Agg posted its worst month since 2016, ending February down -1.44%.
