Credit market commentary

Credit market commentary: May 2019

Leveraged credit declines in May | Prices decline to two-month lows despite stable fundamentals

June 5, 2019 | 2 minute read

Data as of May 31, 2019 unless otherwise noted

Performance (total returns)

BenchmarksMay 2019YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)1.78%4.80%
ICE BofAML U.S. High Yield Index (HY Bonds)-1.27%7.52%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)-0.22%5.49%

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

Leveraged credit declines in May: The leveraged credit markets were lower in May as declining U.S. equities, China-U.S. trade tensions and global growth concerns contributed to weaker demand for risk assets. HY Bonds posted their first negative monthly return of 2019 as the S&P 500 slid -6.35% and 10-year U.S. Treasury yields declined to their lowest levels since 2017.1,2 Alongside the general decline in risk assets, lower-rated credits generally underperformed their higher-rated peers. In May, BB rated bonds returned -0.73%, while B rated bonds and CCC rated bonds returned -1.42% and -2.93%, respectively.1 In the first monthly outflow since December, investors pulled nearly $4.1 billion from high yield bond mutual funds in May.3 Nevertheless, against the backdrop of stable corporate earnings and near-historic low default rates, HY Bond returns remain strongly positive year to date, outperforming Senior Secured Loans as well as core fixed income investments so far in 2019.1,4,5 Senior Secured Loans declined -0.22% in May, the second straight negative monthly return for the asset class, as outflows from bank loan mutual funds accelerated.3 Senior Secured Loans underperformed the Barclays Agg, which benefited from its high sensitivity to duration as Treasury yields declined sharply across the curve, but easily outperformed both the S&P 500 and HY Bonds.3,5

Prices decline to two-month lows despite stable fundamentals: HY Bond and Senior Secured Loan prices each declined to a two-month low on the last trading day of May, weighed down by U.S. equities, which experienced their worst monthly performance since December 2018. HY Bond yields rose approximately 59 bps in May to end the month at a two-month high of 6.76%.6 The rise in yields comes despite stable corporate fundamentals, solid U.S. economic growth and a benign corporate default environment.7 This, combined with an accommodative Fed, may continue to underpin positive returns for both HY Bonds and Senior Secured Loans through the remainder of the year. However, with Fed fund futures currently pricing in at least one rate cut before year-end, bank loan mutual funds may experience additional outflows amid diminished demand for floating-rate investments. While institutional demand for Senior Secured Loans remains robust, further outflows from mutual funds may lead to some additional volatility for the asset class, furthering the case for active management and careful credit selection in the months ahead.

Key takeaway

Credit markets broadly fell as a global flight to quality boosted the duration-sensitive Barclays Agg. 10-year U.S. Treasury rates fell to 20-month lows as trade tensions continued to escalate.

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

  • Federal Reserve Bank of St. Louis,

  • Thomson Reuters Lipper.

  • S&P/LSTA Leveraged Loan Index.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

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

  • J.P. Morgan Default Monitor, March 1, 2019.

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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