Credit market commentary

Credit market commentary: March 2018

Benefiting from their floating rate coupon and position at the top of the capital structure, senior secured loan prices remained relatively steady in the face of rising short-end U.S. Treasury yields and a decline in U.S. equity prices.

April 17, 2018 | 4 minute read

Data as of March 31, 2018 unless otherwise noted

Performance (total returns)

BenchmarksMarch 2018YTD
Bloomberg Barclays U.S. Aggregate Bond Index0.64%-1.46%
ICE BofAML U.S. High Yield Master II Index-0.64%-0.92%
S&P/LSTA Leveraged Loan Index0.25%1.45%

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

Corporate credit benchmarks were mixed in March, with the S&P/LSTA Leveraged Loan Index (senior secured loans) posting a modest gain, while the ICE BofAML High Yield Bond Index (high yield bonds) posted a modest decline. Against the backdrop of a decline in U.S. equities and rising market volatility, leveraged credit investors migrated up the corporate capital structure, with higher-rated investments generally outperforming their lower-rated peers. More broadly, the Bloomberg Barclays U.S. Aggregate Bond Index (the Barclays Agg) generated a positive return in March, benefiting from the benchmark’s high duration sensitivity as long-term U.S. Treasury yields declined.

High yield bonds decline for a second month: High yield bonds returned -0.64% in March, the second straight monthly decline.1 Amid a rise in short-term Treasury bond yields and a spike in U.S. equity volatility, high yield bond mutual funds recorded an outflow of approximately $2.3 billion in March, which brings the year-to-date outflow to approximately $19.3 billion.2 Alongside a 7 bps rise in U.S. 2-year Treasury yields, high yield bond prices declined $0.89 and high yield bond yields widened by approximately 18 bps to 6.34% as of March 31.1,3,4 For perspective, high yield bond yields were sitting at a 2017 low of 5.37% in October. Against the backdrop of increased risk aversion, the higher-rated areas of the bond market held up slightly better than their lower-rated peers, a turnaround from the recent trend. In March, BB rated and B rated bonds generated a total return of -0.62% and -0.52%, respectively.5,6 By comparison, CCC rated bonds provided total returns of -1.00% in March.7

Senior secured loans post gains in March: While last month’s decline in high yield bond prices weighed slightly on the senior secured loan market, the asset class appeared somewhat insulated from broader market volatility. The asset class recorded a gain of 0.25% in March, the asset class’s seventh straight monthly gain.8 Benefiting from their floating rate coupon and position at the top of the corporate capital structure, senior secured loan prices have continued to rise since the outset of 2018, even as bond prices declined.8 For context, senior secured loan prices are up $0.35 since December 31, 2017, as increased interest rate concerns raised the appeal of the asset class, versus a $2.12 decline in high yield bond prices.1,8 Year to date, senior secured loans are now providing returns of 1.45% after returning 4.12% in 2017.8 By comparison, high yield bonds, U.S. 10-year Treasuries and the Barclays Agg are providing a year-to-date return of -0.92%, -2.39% and -1.46%, respectively.1,9,10

Key takeaway

Benefiting from their floating rate coupon and position at the top of the capital structure, senior secured loan prices remained relatively steady in the face of rising short-end U.S. Treasury yields and a decline in U.S. equity prices. Investments with lower durations, such as senior secured loans, have outperformed thus far in 2018 and may display lower levels of volatility if short-term interest rates rise further.

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

  • Thomson Reuters Lipper.

  • Federal Reserve Bank of St. Louis, 2-year Treasury yield,

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

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

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

  • ICE BofAML U.S. High Yield CCC & Lower Rated Index.

  • S&P/LSTA Leveraged Loan Index.

  • ICE BofAML U.S. 10-year Treasury Index.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

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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