Data as of July 31, 2022, unless otherwise noted.
Performance (total returns)
| Benchmarks | July 2022 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | 2.44% | -8.14% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 6.02% | -8.86% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 2.14% | -2.51% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets rally in July: There was a remarkable rally last month as second quarter earnings results were better than feared and markets appear unconvinced that the Fed will be able to hike rates as aggressively going forward, especially given signs of a slowing economy. HY Bonds returned 6.02%, their best monthly return since 2009, and Senior Secured Loans were up 2.14%. Despite this broad-based rally, signs that recession fears remain top of mind were apparent given the relative outperformance of high yield over loans which, from a ratings perspective, is a higher quality market. Higher rated assets outperformed in both markets as well. The 10-year U.S. Treasury yield declined for much of the month given this risk on sentiment, ending July at 2.65%. This boosted the duration sensitive Bloomberg Aggregate Bond Index to its best performance since August 2019. There was only one default in July, impacting both bonds and loans and the trailing twelve-month default rates ended the month at 1.09% and 1.12% in high yield and loans, respectively. Distress in the high yield market declined last month but increased slightly in the loan market. Roughly 6% of high yield bonds trade at spreads wider than 1000 basis points while 3% of loans trade at levels considered distressed. Some evidence of a slowdown in economic activity is being seen in credit as the number of loans downgraded exceeded the number upgraded for the third straight month. This stat is more favorable in the high yield market, which has consistently seen upgrades outpace downgrades.
Update on supply/demand technicals: Despite last month’s supportive market backdrop, credit issuance remained anemic. Just $1.8 billion of high yield bonds were issued in July, which ranks among the lightest months of issuance in the post GFC era. The loan market was largely shuttered as well, with just $3.5 billion of loans pricing, the lightest volume since 2011. On a year over year basis, high yield bond issuance is down 78% compared to the same period in 2021 while loan issuance is 67% lower. Despite this dearth of issuance, credit issuers appear well capitalized, having taken advantage of the favorable funding environment of the past two years and are not facing a near-term maturity wall. Demand dynamics appear to be shifting in credit markets given a preference for higher quality assets. High yield bond funds saw their first monthly inflow this year while loan funds have now experienced three consecutive months of outflows.
Key takeaways
- There was a remarkable rally last month as second quarter earnings results were better than feared and markets appear unconvinced that the Fed will be able to hike rates as aggressively going forward, especially given signs of a slowing economy.
- High yield bonds returned 6.02%, their best monthly return since 2009 and senior secured loans were up 2.14%.
- Declining long term interest rates drove the duration sensitive Bloomberg Agg to its best monthly return since August 2019. The core fixed income proxy was up 2.44%.
