Credit market commentary

Credit market commentary: July 2021

Declining long-term rates have begun to shift the technical picture in credit markets, which bear monitoring going forward.

August 4, 2021 | 5 minute read

Data as of July 31, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksJuly 2021YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)1.12%-0.50%
ICE BofAML U.S. High Yield Index (HY Bonds)0.36%4.07%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)-0.01%3.27%

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 July: Credit market performance was mixed in July. High yield bond spreads started the month at their tightest level since 2007 before widening roughly 40 bps as equity volatility stemming from concerns over the delta variant spilled into credit markets. Spreads edged lower for much of the final two weeks, ultimately ending the month roughly 29 bps wider than where they began. The modest price declines were offset by income and high yield bonds posted a positive return for the month (+0.36%). The loan market followed a similar trajectory for much of the month before experiencing more pronounced spread widening in the last week of July as treasury yields went sharply lower and retail loan flows recorded their first negative week in 27 weeks. In a reversal of the year-to-date trend, CCC-rated bonds and loans underperformed their higher rated peers in each market as each posted their first negative monthly return of 2021. For the second time in three months there were no new defaults and the Trailing Twelve Month (TTM) default rates fell to 1.17% in high yield and 1.11% in loans. Long-term interest rates declined again last month, boosting duration-sensitive assets, such as the Barclays Agg, which was up 1.12%. Recent gains have not yet offset the losses suffered over the first quarter and the Agg remains down -0.50% on a year-to-date basis.

Supportive backdrop presents new challenges for the second half of 2021: The backdrop for credit markets has been extremely supportive for the first seven months of the year: default rates have plummeted, fundamentals continue to improve, and strong economic growth has created a benign outlook for both high yield bonds and senior secured loans. The primary difference between the two markets has been the technical (supply/demand) picture. Rising long-term interest rates over the first few months of the year drove retail investors back into senior secured loans consistently for the first time since 2018 as a preference for floating rate assets emerged. These retail inflows, plus strong institutional demand from CLO creation, have created a supportive technical backdrop for the loan asset class. High yield bonds, with their fixed rate coupon, have experienced modest, but steady, outflows this year. In recent weeks, however, long-term interest rates have declined sharply, which threatens to shift the technical picture in credit markets. Loan fund flows have begun to slow, with July marking the lightest level of inflows this year, including one week of outflows – its first negative monthly return of 2021. High yield bond outflows, conversely, have slowed and there have been several weeks of retail inflows recently, especially following the sharp drop-in rates at the end of July. Whether interest rates continue to decline or return to their upward trajectory remains to be seen, however, we believe these changing technical conditions will continue to have outsized impacts on each market and bear close monitoring.

Key takeaways

  • Credit performance was mixed in July. HY bonds returned +0.36% while loans were down -0.01%.
  • The duration-sensitive Barclays Agg was positive in July as long-term interest rates declined sharply.
  • Declining long-term rates have begun to shift the technical picture in credit markets, which bear monitoring going forward.

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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