Data as of January 31, 2023, unless otherwise noted.
Performance (total returns)
| Benchmarks | January 2023 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | 3.08% | 3.08% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 3.91% | 3.91% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 2.73% | 2.73% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets rallied in January: In a remarkable turnaround from last year’s pervasive negativity, credit markets rallied strongly in January. Signs of slowing inflation and relatively strong economic data assuaged near-term recession fears, boosting market sentiment for much of the month. High yield bonds returned 3.91% while senior secured loans were up 2.73%. Lower rated credit led the way, as recessions fears ebbed and risk appetite improved. CCC bonds gained 6.2%, their strongest monthly return since 2016, versus BB and B bonds, which gained 3.35 and 3.96%, respectively. B and CCC rated loans returned 3.11% and 3.09%, respectively, beating BB rated loans, which returned 2.73%. Despite January’s strong rally, investors expressed caution about the longer-term growth outlook, with long-term rates falling substantially last month. The 10-year U.S. Treasury yield fell nearly 40 basis points, boosting duration sensitive assets such as the Bloomberg Aggregate Bond index, which returned 3.08%. There were five defaults in January, three of which were loan only issuers. The trailing 12-month default rates ticked higher in both markets, ending January at 1.83% and 1.82% for bonds and loans, respectively.
Credit primary market update: The high yield bond primary market saw an uptick in activity last month, with $20.5 billion of bonds issued amid January’s environment of generally positive sentiment, diminished volatility and declining long-term interest rates. The loan market did not keep pace with bonds, with just $13.9 billion of issuance last month. Note however, that to date, only 28.5% of the loan market has transitioned from LIBOR to SOFR, which will serve as a tailwind to loan issuance over the coming months (the transition must be completed by June 2023). January’s issuance comes on the heels of 2022’s extremely anemic primary market. Despite this, credit markets remain, in our view, well capitalized. Only 8% of the market matures before the end of 2024, and many issuers locked in the ultra-low interest rates available in 2020 and 2021.
Key takeaways
- Credit markets rallied month; high yield bonds gained 3.91% while senior secured loans gained 2.73%, as signs of slowing inflation and relatively strong economic data assuaged near-term recession fears.
- The primary market thawed somewhat last month, after 2022’s anemic issuance levels. Credit markets remain, in our view, well capitalized.
