Credit market commentary

Credit market commentary: May 2021

Markets traded sideways for much of the month as inflation concerns and cryptocurrency market volatility weighed on sentiment.

June 2, 2021 | 5 minute read

Data as of May 31, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksMay 2021YTD
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.

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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