Credit market commentary

Credit market commentary: July 2023

Credit markets experienced continued positive momentum in July amid positive economic data, moderating inflation and better-than-expected Q2 earnings reports.

August 9, 2023

Data as of July 31, 2023, unless otherwise noted.

Performance (total returns)

BenchmarksJuly 2023YTD
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.

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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