Credit market commentary

Credit market commentary: June 2023

Driven by stronger than expected economic data in June, credit markets turned higher as senior secured loans returned 2.26% while high yield bonds returned 1.63%.

July 13, 2023

Data as of June 30, 2023, unless otherwise noted.

Performance (total returns)

BenchmarksJune 2023YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)-0.36%2.09%
ICE BofAML U.S. High Yield Index (HY Bonds)1.63%5.41%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)2.26%6.48%

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

Credit turned higher in June amid solid economic data: Driven by stronger than expected economic data in June, credit markets turned higher as senior secured loans returned 2.26% while high yield bonds returned 1.63%. Year to date (YTD), both indexes have returned 6.48% and 5.41% respectively. Amid the month’s risk-on environment, lower-rated securities generally outperformed again in June. CCC bonds returned 3.41% in June compared to 1.20% and 1.65% for BB and B bonds. Among loans, B rated loans saw the highest returns, at 2.52%, compared to 2.08% for CCC loans and 1.95% for BB loans. Treasury yields continued their climb as economic data came in notably stronger than expected. Two-year Treasury yields again drove the move higher, rising 49 bps to end the month at 4.88% as markets began to price in two additional Fed rate hikes. The 10-year Treasury yield rose just 17 bps in June to end the month at 3.82%. The Bloomberg Agg returned -0.36% in June given its higher duration sensitivity. High yield issuers took a step back in June as issuance totaled $14.1 billion compared to $21.7 billion in May. Despite the lower monthly issuance, YTD issuance increased moderately from 2022’s depressed level, totaling $95.6 billion YTD through June compared to $71.0 billion over the same period in 2022. Meanwhile, loan issuance of $22.9 billion was about flat in June from May but is down from a year earlier ($136.8 billion YTD vs $179.7 billion in 2022). High yield bond demand was strong in June amid improved investor sentiment. Inflows totaled approximately $2.6 billion, partially reversing the ~$4.7 billion in outflows in May. Loan funds saw another monthly outflow, though at approximately just $114 million, it was significantly smaller than each of the monthly outflows loans have experienced YTD. Default activity was elevated again in June, with five defaults and seven distressed exchanges. High yield bonds’ trailing 12-month default rate including distressed exchanges, rose 28 bps month over month in June to 2.71%. The senior secured loans default rate rose 12 bps from a month earlier, to 2.98% in June. While the default rate rose for both markets, they remained below the long-term average of 3.2% and 3.1% for high yield bonds and senior secured loans, respectively.

Market technicals remain supportive: Supply/demand dynamics within credit markets also remain favorable for investors. Rising rates, uncertain valuations and a cautious economic outlook have served to keep new debt issuance at extremely low levels. Demand—kept steady from reinvestment of interest and paydowns combined with institutional demand from collateralized loan obligation (CLO) investors—has handily outpaced supply year-to-date. The end result is that 2023 is on pace to be the second consecutive year where credit markets shrink in overall size, supporting prices as steady demand chases a smaller pool of available investments.

Key takeaways

  • Credit saw strong returns in June amid the month’s risk-on environment. Senior secured loans returned 2.26% while high yield bonds returned 1.63%. Returns were generally led by lower-rated securities. CCC bonds outpaced their higher-rated peers while B rated loans saw the highest return in June.
  • Supply/demand dynamics within credit markets also remain favorable for investors as debt issuance has remained very low while demand has handily outpaced demand YTD. As a result, 2023 is on pace to be the second consecutive year where credit markets shrink in overall size, supporting prices as steady demand chases a smaller pool of available investments.

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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