Data as of January 31, 2022, unless otherwise noted.
Performance (total returns)
| Benchmarks | January 2022 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | -1.12% | -1.12% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | -2.75% | -2.75% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 0.36% | 0.36% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets mixed in January: It was a volatile start to the year for most major asset classes. Ongoing COVID concerns, elevated inflation, rising interest rates and a hawkish Fed roiled markets for much of the month. After a late month rally, the S&P 500 ended down -5.2% after suffering a -9.2% intramonth decline. In credit, it was a tale of two markets. High yield bonds declined amid weak market sentiment and rising interest rates, ending January down -2.75%, with each sector posting negative returns for the month. Senior secured loans were buoyed by massive retail inflows and remained positive in January, up 0.36%, with 20 of 21 sectors up on the month. CLOs followed the broader loan market, returning 0.29% in January. The Fed reaffirmed its decidedly hawkish stance, signaling that the first interest rate hike would likely come in March, with hikes potentially occurring at successive meetings thereafter. The central bank also announced the possibility of quantitative tightening to begin this year. Investors were forced to assess this even-more-hawkish pivot; yields rose across the curve and markets are now pricing in five rate hikes this year. The 10-year Treasury rose 27 basis points during the month, sending duration sensitive assets sharply lower. The Agg was down -2.15%, its worst month since November 2016. Default activity remained benign in January. The Trailing Twelve Month (TTM) rate ended the month at 0.32% and 0.66% in high yield and loans, respectively. Importantly, despite the price declines in the high yield market in January, levels of distress in the market remain negligible. Only 1.4% of the combined bond and loan markets is trading at levels classified as distressed, signaling few changes to the current low default environment.
Bonds eked out gain over loans in 2021: Technicals were a major driver of market dynamics in January, likely contributing to the loan asset class’s strong outperformance versus bonds. Investors often avoid fixed rate products during periods of rising interest rates, which led to sharp retail outflows in high yield. In total, HY high yield funds saw $6.8 billion of outflows, equivalent to 2.6% of AUM. However, investors did not shun credit entirely. Money poured into floating rate senior secured loans. Retail fund flows totaled $6.6 billion, the asset class’s 14thth consecutive monthly inflow. With the potential for broader market volatility to continue, and the Fed likely to raise interest rates in March, investor sentiment and retail fund flows will, in our view, be key dynamics to watch in credit in 2022.
Key takeaways
- Credit markets were mixed in January. High yield bonds declined alongside broader markets, down -2.75% on the month, while loans remained positive, up 0.36%.
- Rising interest rates sent duration duration-sensitive core fixed income sharply lower. The Agg was down -2.15%.
- Technicals were a major driver of market dynamics in January, likely contributing to the strong outperformance of loans vs. bonds.
