Data as of May 31, 2022, unless otherwise noted.
Performance (total returns)
| Benchmarks | May 2022 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | 0.64% | -8.92% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 0.25% | -7.76% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | -2.56% | -2.45% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets dynamics reverse in May: This year’s credit market dynamics reversed course sharply in May. Senior secured loans declined as long-term interest rates and rates volatility fell last month. Loans were down -2.56%, their worst month since March 2020. High yield bonds extended their slide for the first half of May, before the stabilizing interest rate picture helped stoke a strong comeback. HY bonds ended the month up 25 bps. The 10-year U.S. Treasury yield peaked early in the month, crossing 3% for the first time since November 2018, before retracing those advances, ending May at 2.84%, roughly 9 bps below where it began. These declining yields boosted the Bloomberg Agg to its first positive monthly return since November. On a year-to-date basis, the index remains down -8.92%. Weak sentiment in the loan market was evident in retail fund flows this month. The asset class, which had seen near consistent inflows since late 2020, saw their first monthly outflow in 18 months. Investors pulled money from HY bond funds as well, although the pace of outflows continues to slow. There was only one default in May, impacting both bonds and loans. The trailing 12-month default rates increased slightly, ending at 0.72% and 0.94% in high yield and loans, respectively.
Bond and loan performance continues to diverge: Bond and loan performance continues to decouple this year, as markets react to an evolving macroeconomic backdrop. Earlier in the year, rising interest rates pressured duration-sensitive bonds while floating rate loans were largely immune from the acute selloff witnessed through April. As the macro narrative has begun to shift from inflation and the Fed’s policy tightening toward the ultimate impact on economic growth, credit market dynamics have changed. Specifically, investors have recently favored higher quality assets; BB rated bonds were the top performer in May while CCCs declined the most. Senior secured loans broadly suffered, as the quality of the index has deteriorated in recent years. The rise in loan-only issues has skewed the market down in quality. The volume of B- rated loans outstanding has doubled over the past three years, and now accounts for 27% of the entire leveraged loan market, its largest market share in history. Plus, higher short term interest rates have begun to call into question issuers’ ability to service floating rate debt. As the macro environment continues to evolve, performance between the two asset classes may continue to diverge, stressing the need for active, flexible mandates with the ability to invest across credit markets.
Key takeaways
- Credit market dynamics changed in May. High yield bonds were up 0.25% while loans were down -2.56%, their worst month since March 2020.
- Declining long-term rates boosted the duration sensitive Bloomberg Agg to its first positive return since November. On a year-to-date basis, the core fixed income proxy remains down -8.92%.
- A shifting macro narrative has caused a decoupling in performance between bond and loan markets. Concerns over global economic growth have led investors to favor quality assets such as higher rated HY bonds, while the loan market, which has seen a deterioration in quality by rating composition, declined sharply.
