Credit market commentary

Credit market commentary: January 2022

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.

February 11, 2022 | 7 minute read

Data as of January 31, 2022, unless otherwise noted.

Performance (total returns)

BenchmarksJanuary 2022YTD
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.

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 www.fsinvestments.com/investments/index-disclaimers-and-definitions 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.

Index descriptions: Bloomberg 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 www.fsinvestments.com/investments/index-disclaimers-and-definitions 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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