Data as of May 31, 2021, unless otherwise noted.
Performance (total returns)
| Benchmarks | May 2021 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | 0.33% | -2.29% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 0.29% | 2.31% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 0.58% | 2.90% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets positive in May: Markets traded sideways for much of the month as inflation concerns and cryptocurrency market volatility weighed on sentiment. HY Bonds and Senior Secured Loans managed to post positive returns in May, up 0.29% and 0.58%, respectively. HY Bond returns were driven by income, which offset slight price declines as spreads drifted wider for the first half of the month before tightening to end May just 4 bps wider than where they began. Senior Secured Loan market prices rose slightly while spreads tightened to levels not seen since February 2019. Performance in both markets was once again led by CCC rated assets, which are now up 7.5% and 8.9% year to date in the high yield and loan markets, respectively. Default rates continued to decline last month as many of the large defaults that occurred during the height of the economic shutdowns have rolled out of the trailing 12-month calculation. The HY bond default rate currently stands at 2.58% while the rate in the loan market is at 1.52%. Long-term interest rates were relatively rangebound throughout the month, despite rising inflation expectations, as the duration-sensitive Barclays Agg posted just its second positive monthly return for the year.
Opportunities in event-driven credit: Throughout much of the last year, heightened dispersion among credit ratings and industries offered opportunity for active managers. In recent months, most of that lingering dispersion has evaporated. Investors’ search for yield has driven spreads between the highest-rated BB bonds and lowest-rated CCCs to their tightest level since February 2011, and 19 of 21 sectors in the high yield market are positive year to date. With spreads tight and little dispersion remaining, we see opportunity in event-driven situations such as mergers and acquisitions (M&A) or new issue transactions. M&A activity has been robust in recent months — Q4 2020 was the busiest quarter for M&A on record, and the pace has continued year to date. Existing bondholders may benefit from a “pull to par” effect if debt is refinanced. New issuance has also been strong this year as companies look to lock in financing at low interest rates. A portfolio composed solely of new-issue bonds would have outperformed HY Bonds every year since 2010. As of May 31, new-issue bonds are outperforming bonds trading in the secondary market by 340 bps year to date and have, on average, carried a yield 43 bps above issues in the secondary. If accessed correctly, these event-driven situations can offer attractive opportunities in today’s tight-spread environment.
Key takeaways
- Markets traded sideways for much of the month as inflation concerns and cryptocurrency market volatility weighed on sentiment.
- Credit markets managed positive returns, with HY Bonds up 0.29% and Senior Secured Loans up 0.58%.
- The duration-sensitive Barclays Agg posted its second positive return of the year in May as long-term interest rates remained relatively rangebound.
