Data as of July 31, 2020 unless otherwise noted.
Performance (total returns)
| Benchmarks | July 2020 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | 1.25% | 7.72% |
| ICE BofAML U.S. High Yield Master II Index (HY Bonds) | 4.78% | -0.23% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 1.96% | -2.74% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Leveraged credit recovery continues in July: Credit markets continued their upward climb in July, with HY Bonds and Senior Secured Loans each posting a fourth consecutive month of gains. Bonds returned 4.78%, nearing positive territory for the year but falling just short. Loans lagged high yield, returning 1.96% in July. The recovery, which stalled in late June, was renewed with vigor as optimism over continued reopening, progress toward a vaccine and a dovish Fed outweighed concern over rising COVID cases. Technical conditions in the high yield market were supportive as new issuance slowed, but investors continued to pour money into bond funds, which aided in the asset class’s outperformance versus loans. Within HY Bonds, fallen angels (formerly investment grade companies downgraded to high yield) have been among the top performers since the March lows, driven by explicit Fed support and strong investor appetite. Elsewhere in fixed income, the search for income intensifies as yields on investment grade corporate bonds hit an all-time low of just 1.92% while duration has extended to a record 8.41.
A tale of two markets: Dispersion in high yield bond, loan return drivers: HY Bonds and Senior Secured Loans have broadly rebounded alongside risk assets since late March. Looking beneath the surface, however, reveals dispersion in performance, with different forces at play in each market. The rally since the March 23 low has been led by higher-rated assets, with CCCs in both markets lagging. The performance gap with higher-rated assets has closed considerably in the high yield market recently, with CCC rated bonds underperforming B rated bonds by just 2.2% since the start of the rally. In the loan market, however, the underperformance by CCCs remains drastic, with these lowest-rated assets underperforming B rated loans by over 760 bps over the same time period. Much of this phenomenon can be attributed to technical conditions in the loan market, specifically limits on the amount of CCC rated assets that CLOs can hold. Given the large amount of loan downgrades year to date, many CLOs are unable to purchase these loans, leaving a dearth of demand. Meanwhile, in the high yield market, performance dispersion by rating has dissipated, but dispersion by sector remains high. Industries most impacted by the virus and associated economic fallout, such as energy and consumer cyclicals, have underperformed less heavily impacted sectors such as utilities and technology. Discerning credit investors may find idiosyncratic opportunities in each of these underperforming areas of the markets.
Key takeaways
- The recovery in markets continued in July as optimism surrounding reopening and further stimulus measures outweighed fears of rising cases.
- HY Bonds and Senior Secured Loans returned 4.78% and 1.96%, respectively.
- Interest rates fell steadily throughout the month, boosting the duration-sensitive Barclays Agg, which returned 1.25%.
