Credit market commentary

Credit market commentary: January 2021

Credit markets rose through the first few weeks of the month on stimulus optimism and firm technicals in the loan market. However, equity volatility weighed on both asset classes in January’s final week

February 3, 2021 | 5 minute read

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

Performance (total returns)

BenchmarksJanuary 2021YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.72%-0.72%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)0.38%0.38%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.19%1.19%

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

Leveraged credit starts 2021 on a positive note: HY Bonds and Senior Secured Loans each started the year on a positive note, returning 0.38% and 1.19%, respectively, in January. Both markets rose steadily to start the month as Georgia’s Senate results sustained optimism for potential further stimulus measures. HY Bond yields touched a record low mid-month and loan prices rose for 17 consecutive sessions. Meanwhile, equity markets were volatile for much of January, ending the month down -1.01%, as investors continue to assess the long-term implications of the pandemic and a retail-driven short squeeze weighed on sentiment. Credit markets traded lower in sympathy during the final week of the month. Performance in both HY Bonds and Senior Secured Loans was driven by the lowest-rated CCC assets, which have outperformed their higher-rated counterparts since the reflation narrative took hold in mid-November. On a sector basis, performance was driven by cyclical areas such as energy, transportation and metals & mining. Neither market had a default last month and the trailing 12-month rate continued to decline, ending the month at 6.04% for high yield and 3.79% for loans. The duration-sensitive Barclays Agg lost -0.72%, failing to hedge equities in their descent, as the index was unable to recover from an early-month rate spike.

Credit market dynamics begin to diverge: While both HY Bonds and Senior Secured Loans posted positive returns last month, a divergence in market dynamics was evident. These markets are generally impacted by many of the same forces, such as economic conditions and company fundamentals, and often trade in tandem, at least directionally. However, the technical backdrop was radically different in each market in January. After years of outflows, demand was firm for Senior Secured Loans as investors flocked to floating-rate products as rates rose early in the month. Additionally, CLO issuance continues to steadily increase, which represents a key source of demand for loans, leaving the overall technical picture in the loan market relatively balanced. High yield bond issuance continued at a record pace as companies lock in ultra-low financing, and January was the second-most active new-issue month on record. But HY bond funds saw a second straight monthly outflow from retail investors, which created a market of excess supply. While both markets are sensitive to the broader economic backdrop and market environment, January highlighted the nuances that exist among them. We believe this benefits active managers that can seek arbitrage opportunities across both markets.

Key takeaways

  • Credit markets rose through the first few weeks of the month on stimulus optimism and firm technicals in the loan market. However, equity volatility weighed on both asset classes in January’s final week.
  • HY Bonds returned 0.38% while Senior Secured Loans were up 1.19%.
  • The duration-sensitive Barclays Agg lost -0.72%, unable to overcome an early-month rate spike.

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.

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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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