Data as of March 31, 2022, unless otherwise noted.
Performance (total returns)
|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.
- 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.