Credit market commentary

Credit market commentary: June 2021

The duration-sensitive Barclays Agg posted its third positive return of the year in June as long-term interest rates declined slightly.

July 7, 2021 | 5 minute read

Data as of June 30, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksJune 2021YTD
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.

Key takeaways

  • 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.

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site