Credit market commentary

Credit market commentary: June 2019

Leveraged credit rebounds in June | HY Bonds benefit from repriced rate expectations

July 3, 2019 | 3 minute read

Data as of June 30, 2019 unless otherwise noted

Performance (total returns)

BenchmarksJune 2019YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)1.26%6.11%
ICE BofAML U.S. High Yield Index (HY Bonds)2.42%10.12%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.24%5.74%

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

Leveraged credit rebounds in June: The leveraged credit markets rose in June amid rising U.S. equity prices, optimism surrounding a China-U.S. trade truce and declining interest rates. HY Bonds rallied significantly in June, more than erasing the declines of May, as inflows into the asset class accelerated.1 In a reversal from the outflows of May, HY Bond mutual funds pulled in approximately $2.2 billion in June and have now experienced $12.1 billion in inflows year to date.2 Drilling down deeper into HY Bond returns, higher-rated areas of the market generally outperformed their lower-rated peers. Last month, BB rated bonds returned 2.80%, while B rated bonds and CCC rated bonds returned 2.34% and 1.38%, respectively.3,4,5 Senior Secured Loans reversed most of their May declines but were only slightly positive in June.6 Amid a repricing of Fed fund expectations, outflows from bank loan mutual funds persisted, with the asset class experiencing 32 straight weeks of outflows at month-end.2 Senior Secured Loans underperformed the Barclays Agg, which benefited from its high sensitivity to duration, as Treasury yields declined sharply across the curve amid growing expectations of an interest rate cut by the Federal Reserve at its next meeting.

HY Bonds benefit from repriced rate expectations: With Fed fund futures pricing in at least two, and possibly three, rate cuts before year-end, demand for floating rate Senior Secured Loans continued to decline in June. Following nine straight monthly outflows, bank loan mutual fund AUM has declined from a little over $108 billion to just under $78 billion. While new collateralized loan obligation (CLO) issuance has more than made up for this decline in demand, Senior Secured Loans continue to face selling pressure from this corner of the market. HY Bonds, on the other hand, have benefited from the repricing of interest rate expectations as investors seek out higher-yielding fixed-rate investments. HY Bond yields declined approximately 70 basis points in June to end the month at 6.06%, while spreads over Treasuries declined a more modest 53 basis points to 4.20%.7 This excess yield, combined with stable corporate fundamentals and a benign corporate default environment, may continue to underpin investors’ demand for HY Bonds through the remainder of the year.8 However, further outflows from bank loan mutual funds may lead to some additional volatility for Senior Secured Loans.

Key takeaway

The likelihood of Fed rate cuts sent Treasury rates lower, boosting the duration-sensitive Barclays Agg, while optimism surrounding U.S.-China trade talks was a tailwind for leveraged credit.

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

  • Thomson Reuters Lipper.

  • ICE BofAML U.S. High Yield BB Index.

  • ICE BofAML U.S. High Yield B Index.

  • ICE BofAML U.S. High Yield CCC Index.

  • S&P/LSTA Leveraged Loan Index.

  • ICE BofAML U.S. High Yield Master II Index (yield-to-worst/spread-to-worst over govt).

  • J.P. Morgan Default Monitor, 7/1/2019.

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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