Data as of June 30, 2021, unless otherwise noted.
Performance (total returns)
|Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)||0.70%||-1.60%|
|ICE BofAML U.S. High Yield Index (HY Bonds)||1.37%||3.70%|
|S&P/LSTA Leveraged Loan Index (Senior Secured Loans)||0.37%||3.28%|
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets positive in June: There was a renewed sense of optimism in the month of June. Strong economic data, robust earnings forecasts and a domestic economy that has largely reopened outweighed some lingering inflation concerns and fears of near-term Federal Reserve action. HY Bonds had their best month of the year, returning 1.37%, and their strongest outperformance versus loans since November 2020. Senior Secured Loans were positive as well, up 0.37%. The benign market backdrop has sustained the rally in lower-rated assets. CCC rated bonds are up 9.5% in 2021, outperforming BB rated issues by 684 bps, while CCC loans are up 10.0% compared to BB loans, which are up 1.6%. Default rates continue to fall sharply and ended June below 2% in both markets, while the level of distress has fallen to its lowest level since 2011. Long-term interest rates declined again last month, boosting duration-sensitive assets such as the Barclays Agg, which was up 0.70%. These recent gains have not yet offset the losses suffered over the first quarter, and the Agg remains down -1.60% on a year-to-date basis.
Supportive backdrop presents new challenges for the second half of 2021: In the first half of 2021 credit markets were strong and, in many ways, fairly predictable. Beneficiaries of the reopening or reflationary narrative have led the way, with energy high yield bonds up 11.3% year to date followed by transportation and gaming/leisure. Returns for both bonds and loans have been evenly split between income and price appreciation as spreads have consistently tightened for much of the year. In the high yield market, spreads have now surpassed the tights that followed the Global Financial Crisis (GFC) and are approaching their all-time tight levels. Spreads in the loan market, meanwhile, are nearing post-GFC levels. These tight spreads are not unwarranted. Earnings growth is strong, fundamentals continue to improve, default rates have cratered and supply/demand technicals remain supportive. Furthermore, tight spreads do not beget imminently wider spreads. Leading up to the GFC, spreads remained between 250 bps and 400 bps in high yield—both considered “tight” levels—and within a 50 bps range in the loan market for over two years. An examination of potential catalysts for spread widening, namely in the form of unexpected spikes in inflation or interest rates, do little to deter us from believing that valuations will remain at or near these levels for the balance of the year. Looking forward, we believe spreads are not likely to tighten much further, leaving returns for passive or benchmark-constrained investors limited largely to income.
- There was a renewed sense of optimism during June after markets broadly traded sideways during May.
- HY Bonds had their best month this year, up 1.37%, and strongest outperformance versus loans, which were up 0.37%, since November 2020.
- The duration-sensitive Barclays Agg posted its third positive return of the year in June as long-term interest rates declined slightly.