Credit market commentary

Credit market commentary: July 2020

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%.

August 4, 2020 | 5 minute read

Data as of July 31, 2020 unless otherwise noted.

Performance (total returns)

BenchmarksJuly 2020YTD
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%.

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 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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