Credit market commentary

Credit market commentary: May 2022

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.

June 6, 2022

Data as of May 31, 2022, unless otherwise noted.

Performance (total returns)

BenchmarksMay 2022YTD
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.

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site