Data as of May 31, 2023, unless otherwise noted.
Performance (total returns)
| Benchmarks | May 2023 | YTD |
| Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg) | -1.09% | 2.46% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | -0.95% | 3.73% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | -0.18% | 4.12% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit returns mildly negative in May: Despite solid economic data and better-than-feared corporate earnings credit turned in mildly negative returns in May. Senior secured loans returned -0.18% while high yield bonds returned -0.95%. Markets maintained their preference for lower-rated and lower-priced assets as CCC loans were the only ratings category to generate positive returns in May, up 0.78%. B and BB loans returned -0.43% and -0.01%, respectively. CCC bonds returned -0.70% compared to -1.11% for BB bonds. The same pattern has held for year to date returns through May. CCC loans have returned 6.27% outpacing BB loans by 333 bps while CCC bonds (+6.18%) have bested BB bonds by 324 bps. Treasury yields moved higher amid resilient economic growth, robust consumer spending, a strong labor market and a successful resolution to the debt ceiling debacle. The 2-year Treasury ended the month 33 bps higher, at 4.39%, while the 10-year Treasury rose 18 bps, to 3.63%. Against this backdrop, the 10-2-year Treasury curve steepened somewhat to end the month at -77 bps. The Bloomberg Agg returned -1.09% in May, given its higher duration sensitivity. Following strong relative inflows in April as demand recovered, high yield bond funds again experienced outflows in May, totaling approximately -$4.7 billion. Loan funds saw outflows of -$3.5 billion in May, or approximately $1.3 billion more than April. The loan asset class has seen outflows in 40 of the past 41 weeks, totaling over -$31.1 billion in outflows over that period. Default activity rose again in May, with three defaults and four distressed exchanges. High yield bonds’ trailing twelve-month default rate including distressed exchanges, rose 23 basis points MoM in May to 2.41%. The senior secured loans default rate rose only 8 bps from a month earlier but remained above HY bonds’, at 2.82% in May. While the default rate rose for both markets, they continued to be below the long-term average of 3.2% and 3.1% for high yield bonds and senior secured loans, respectively.
Spreads tighten amid shrinking HY & Loan markets: Following the bank stress in March that essentially halted new high yield bond issuance for several weeks, issuance has again picked up steam over the past two months, totaling $18.8 billion in April and $21.7 billion in May compared to just $5.6 billion in March. In May, new high yield bond issuance was the second-highest over the past 18 months, behind only the $27.2 billion issued in Jan. 2022. Despite the recent pickup, both the high yield bonds and senior secured loan markets have fallen deeper into supply deficits since the second half of 2022 as issuance has slowed over the past several quarters. While both markets (especially loans) have seen retail outflows, demand has still outpaced new supply. Supply deficits can be supportive of prices, as market participants are left with a shrinking pool of available investments.
Key takeaways
- Credit turned in mildly negative returns in May. Senior secured loans returned -0.18% while high yield bonds returned -0.95%. Once again, returns were led by lower-rated securities as CCC loans were the only ratings category to generate positive returns in May.
- New high yield bond issuance in May reached nearly $22 billion in May, its second highest amount of monthly issuance over the past 18 months and a strong rebound from the $5.6 billion of new issuance as regional bank stress peaked in March. Despite the recent pickup, both the high yield bonds and senior secured loan markets have fallen deeper into supply deficits since the second half of 2022.
