Credit market commentary

Credit market commentary: March 2023

Amid the emergence of significant regional and global bank stress, fixed income volatility spiked in March as the MOVE Index rose to levels last seen in 2008.

April 12, 2023

Data as of March 31, 2023, unless otherwise noted.

Performance (total returns)

BenchmarksMarch 2023YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)2.54%2.96%
ICE BofAML U.S. High Yield Index (HY Bonds)1.13%3.72%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)-0.33%3.23%

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

Credit spreads widened in March: Amid the emergence of significant regional and global bank stress, fixed income volatility spiked in March as the Merrill Lynch Optimal Volatility Estimate (MOVE) Index rose to levels last seen in 2008. Despite solid economic data, Fed funds rate expectations quickly repriced lower, to a terminal rate of just 4.95% compared to 5.50% at the start of March. Credit markets were mixed, falling for the first half of the month before rebounding strongly. High yield bonds rose 1.13% while senior secured loans declined -0.33%. As concerns about the banking sector weighed on risk sentiment and Fed Funds expectations shifted lower, higher-rated assets outperformed across both markets, reversing a trend that had prevailed in the previous two months. BB bonds returned 1.89% in March compared to -1.53% for CCC bonds. BB loans fell -0.03%, strongly outperforming CCC loans, which fell -2.05%. After rising to their highest point since 2007 in February, interest rates rapidly reversed in March at the sign of growing bank pressures. The 2-year Treasury yield fell 104 basis points, from a peak of 5.07% on March 8 to 4.03% at month-end. The 10-year Treasury yield saw a more modest decline of 59 basis points in March, closing at 3.47% as the yield curve flattened in March. These moves boosted the Bloomberg Agg Index in March, which rose 2.54%. High yield issuance totaled just $5.6 billion in March, as an initial rise in rates—followed by the banking news—froze the market from March 2 until March 27. Loan issuance was down compared to a strong February, but still saw $17.4 billion of loans issued in March. Outflows from retail high yield bond funds slowed from February to -$4.9 billion, a month that saw the largest outflows since March 2020, as retail demand has remained generally weak. Loan outflows, impacted by sentiment around falling rates and general risk aversion, accelerated to -$4.4 billion in March. The loan asset class has experienced outflows in 31 of the past 32 weeks, totaling -$25.3 billion over that period. Default activity declined in March, with two defaults and three distressed exchanges. The trailing 12-month default rate, including distressed exchanges, fell in both markets to 1.91% and 2.22% for bonds and loans, respectively.

Credit fundamentals remain strong: High yield bond leverage sits at or near a record low while interest coverage is at or near a record high. The picture for loans is also attractive versus history, albeit less so than high yield. The most recent data available for Q4 showed high yield companies growing revenue and EBITDA 9% and 14% year over year, respectively, and loan issuers growing 12% and 5% year over year, respectively. Some cracks have begun to show in the form of margin weakness and rising interest expense, but for now credit fundamentals remain a source of strength. Should this picture deteriorate, the relative level of spread needed to compensate investors for credit risk would likely move higher, in our view.

Key takeaways

  • Credit returns were mixed in March despite renewed volatility driven by significant regional and global bank pressures; high yield bonds returned 1.13% while senior secured loans were flat (-0.33%). BB securities outperformed lower rated, CCC assets in March.    
  • Despite the macro volatility, credit fundamentals remain strong. High yield leverage sits at, or near, record lows while earnings growth for both high yield companies and loan issuers remains robust.   

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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