Credit market commentary

Credit market commentary: July 2022

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.

August 15, 2022

Data as of July 31, 2022, unless otherwise noted.

Performance (total returns)

BenchmarksJuly 2022YTD
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%.

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site