Credit market commentary

Credit market commentary: March 2022

Sharply higher interest rates, geopolitical tensions, a volatile commodities complex, inflation, and the ultimate course of the Fed’s tightening cycle have caused volatility for much of the quarter as markets have been forced to quickly recalibrate expectations given these rapidly evolving situations.

April 6, 2022

Data as of March 31, 2022, unless otherwise noted.

Performance (total returns)

BenchmarksMarch 2022YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)-2.78%-5.93%
ICE BofAML U.S. High Yield Index (HY Bonds)-0.92%-4.51%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.05%-0.10%

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

Credit markets mixed in March:  Sharply higher interest rates, geopolitical tensions, a volatile commodities complex, inflation, and the ultimate course of the Fed’s tightening cycle have caused volatility for much of the quarter as markets have been forced to quickly recalibrate expectations given these rapidly evolving situations. Credit markets continued their declines during the first half of March before both high yield bonds and senior secured loans abruptly changed course, climbing for much of the last two weeks of the month. HY bonds were down nearly -3% before paring a significant portion of those declines, ending March with a -0.92% loss. Senior secured loans managed to eke out a positive return for the month, up 0.05%. The 10-year U.S. Treasury rose sharply during March, eclipsing 2.5% before receding slightly. Long term rates are now nearly 100 bps higher than where they began the year, weighing significantly on core fixed income. The Bloomberg Agg was down -2.78% last month, and lost -5.83% in Q1, its worst quarterly decline since 1980. The highest rated, most duration sensitive portions of the high yield market have also struggled this year; BB bonds have underperformed CCCs for three consecutive months. High yield bond funds saw their first weekly retail inflow since early January during the last week of March, snapping an 11-week streak of outflows. Investors continued to flock to floating-rate senior secured loan funds, which drew their 16th consecutive monthly inflow, although the magnitude of those inflows declined last month. Default activity was benign once again. The Trailing Twelve Month (TTM) rate ended the month at 0.50% and 0.86% in high yield and loans, respectively.

Bonds vs. loans:  Year to date, senior secured loans are down -0.10%, significantly outperforming high yield bonds which are down -4.51%. This performance dynamic is relatively unsurprising, as the floating rate nature of the loan asset class has made it less exposed to rising interest rates. However, the degree of outperformance by loans is, in our view, unlikely to continue at this rate. The average performance gap on an annual basis between the two markets is 2.15%, with high yield outperforming loans in 18 of the past 25 years. Loans are currently beating bonds by 4.41%, suggesting room for high yield to outperform in the coming quarters. The divergence in performance to-date has also caused the relative attractiveness of high yield bonds versus loans, as evidenced by the carry differential (difference in yield to maturities, not accounting for future rate increases, between the two asset classes), to rise to multi-year highs. Plus, given recent moves, high yield now yields 6.2%, up from just under 4% last year, marking the highest level of yield since July 2020.This dynamic will be one to watch in the coming quarters.

Key takeaways

  • Credit markets declined for the first half of March, before abruptly changing course and rising during the last two weeks of the month. High yield bonds still ended the month down -0.92% while loans managed to eke out a gain, up 0.05%.
  • Rising long term rates have pressured duration sensitive asset classes this year. The Bloomberg Agg lost -5.93% in Q1, its worst quarterly decline since 1980.
  • Senior secured loan and bond performance has diverged significantly this year. We believe that the recent degree of outperformance by loans vs bonds is likely unsustainable.

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