Data as of July 31, 2023, unless otherwise noted.
Performance (total returns)
| Benchmarks | July 2023 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | -0.07% | 2.02% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 1.42% | 6.92% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 1.29% | 7.85% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Key takeaways
- Credit markets experienced continued positive momentum in July amid positive economic data, moderating inflation and better-than-expected Q2 earnings reports. Senior secured loans returned 1.29% while high yield bonds returned 1.42%.
- Returns in July were again led by lower-rated securities. The performance delta between CCC and BB rated securities has grown wider throughout 2023 amid solid economic data and improved investor sentiment. CCCs present a significantly higher risk profile amid still-significant macro uncertainty.
Solid credit returns in July amid improved investor sentiment: Amid positive economic data, moderating inflation and better-than-expected Q2 earnings reports, the momentum supporting credit markets remained in place in July as spreads on high yield bonds tightened to their lowest point of the year. Senior secured loans returned 1.29% while high yield bonds returned 1.42%. Year to date, both indexes have turned in strong returns, at 7.85% and 6.92%, respectively. Driven by growing hopes for an economic soft landing and improved investor sentiment, lower-rated securities again outperformed their higher-rated peers in July. CCC bonds returned 2.44% compared to 1.47% and 1.15% for B and BB bonds. Among loans, CCC loans returned 2.32% versus 1.43% for B loans and 0.81% for B rates loans. 2-year Treasury yields were about flat (-1 basis point) in July, halting their rise of the past several months as June inflation data notably surprised to the downside and fueled expectations that the Fed may pause following its July rate hike. Amid the benign inflation report and solid economic data, 10-year Treasury yields rose 12 bps to end the month at 3.96%. High yield issuance has trailed off for each of the past two months, totaling $14.1 billion in June and just $6.7 billion in July compared to $21.7 billion in May. YTD, high yield issuance has increased moderately from 2022’s depressed levels, totaling $102.3 billion YTD through July compared to $72.9 billion over the same period in 2022. $23.0 billion of new loans were issued in July, which was generally in line with the issuance numbers of the past several months. YTD through July, loan issuance of $158.5 billion is down from $184.5 billion issued over the same timeframe in 2022. Demand for senior secured loans notably improved in July as loan funds saw their first monthly inflow in 2023 of approximately $45 million. High yield bond flows were also positive at approximately $1.2 billion in July. However, fund flows were down from June, when they saw approximately $2.6 billion in inflows. Default activity moderated in July with two defaults and two distressed exchanges, compared to five defaults and seven distressed exchanged a month earlier. Against this backdrop, high yield bonds’ trailing 12-month default rate including distressed exchanges, fell 44 bps month over month in July to 2.29%. The default rate for senior secured loans rose in July to 2.99%. Across both markets, default rates remained below the long-term averages of 3.2% and 3.1% for high yield bonds and senior secured loans, respectively.
Can CCCs continue to outperform? Following a strong start to the year, lower-rated securities have continued to build on their outperformance of higher-rated peers through 2023 as economic data has come in stronger than expected and fears of a hard economic landing have diminished. As of July 2023, CCC rated bonds (12.5%) have more than doubled the performance of BB rated bonds (5.4%) while loans have seen a similar pattern, with CCC loans outpacing BB loans by approximately 5.2%. Despite their strong outperformance though July, CCC rated securities present a notably higher risk-profile than their higher-rated peers amid still-significant macro uncertainty and the potential for slowing growth through the remainder of the year.
