Credit market commentary

Credit market commentary: June 2018

High yield bonds and senior secured loans gain in June. Yield curve flattens on rising rate expectations.

July 11, 2018 | 3 minute read

Data as of June 30, 2018 unless otherwise noted

Performance (total returns)

BenchmarksJune 2018YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.12%-1.62%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)0.35%0.08%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.12%2.14%

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

High yield bonds and senior secured loans gain in June: Credit markets were slightly higher in June, with HY Bonds outperforming Senior Secured Loans for just the second time over the past nine months. HY Bonds returned 0.35% in June even as U.S. equity volatility sapped some investor demand towards month end.1 Investor fund flows remained negative in June, with high yield bond mutual funds now recording an outflow in eight of the past nine months.2 Senior Secured Loans posted a modest gain and have now posted only one month of negative returns over the past 12 months.3 Senior secured loans remain one of the few fixed income investments generating positive returns in 2018. For perspective, the Barclays Agg returned -0.12% in June and is negative through the first half of 2018 due, in part, to the index’s higher sensitivity to rising interest rates.4

Yield curve flattens on rising rate expectations: The yield on the U.S. 10-year Treasury note remained relatively flat in June as trade-related tensions kept yields tethered to their May lows. By month end, U.S. 10-year Treasury yields were approximately 2.84%, compared to 2.86% at the end of May and a high of 3.11% in mid-May.5 The U.S. 2-year Treasury note yield, which is more sensitive to U.S. Federal Reserve rate expectations, rose in June, resulting in the flattest yield curve since 2007.5 Through the first half of 2018, the 2-year yield is up 64 basis points.5 As a result, higher-duration investments have generally underperformed. For example, both HY Bonds and Senior Secured Loans have outperformed the higher-duration Barclays Agg through the first six months of the year. Senior secured loans, which have floating rate coupons, have particularly benefited from the rise in short-term interest rates seen so far in 2018 and have largely avoided the volatility experienced by corporate bonds.

Key takeaway

HY Bonds and Senior Secured Loans outperformed the Barclays Agg as short-term interest rates moved slightly higher and longer-term rates were mostly unchanged for the month.

  • ICE BofAML U.S. High Yield Master II Index.

  • Thomson Reuters Lipper.

  • S&P/LSTA Leveraged Loan Index.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

  • Federal Reserve Bank of St. Louis.

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.

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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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