Credit market commentary

Credit market commentary: November 2020

Credit rallied amid broad market strength in November on news of multiple potentially viable COVID-19 vaccines.

December 3, 2020 | 5 minute read

Data as of November 30, 2020, unless otherwise noted.

Performance (total returns)

BenchmarksNovember 2020YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)0.98%7.36%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)4.00%4.18%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)2.23%1.76%

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Leveraged credit rallied in November: HY Bonds and Senior Secured Loans rallied in November amid broad market strength, returning 4.00% and 2.23%, respectively. For loans, this marks the eighth consecutive positive monthly return, while HY Bonds have only posted one negative monthly return over that time frame. The rally began following the election, as the prospect of a divided government seemed to be considered a Goldilocks scenario for markets. What started as market optimism soon became euphoria as news of multiple potentially viable vaccines sent markets higher for the remainder of the month, even as news of rising COVID cases continued and fresh restrictions were enacted in major cities. In further evidence of the broad risk-on sentiment, investors poured money into bond funds for much of the month and outflows from the loan asset class slowed. November marked the first month with zero bond or loan defaults since August 2018. The default rate in both markets declined for the third time in four months, to 6.15% for bonds and 3.79% for loans. The duration-sensitive Barclays Agg returned 0.98%, benefiting from a slight decline in rates after an early month spike.

Euphoria over vaccine news has sparked dramatic rotation: News of multiple potentially viable COVID-19 vaccines sparked a broad risk-on sentiment and drastic rotations across markets. All month long, lower-rated assets and sectors hit hardest by the pandemic and its associated economic shutdowns rallied, a stark reversal in year-to-date trends. CCC rated assets dramatically outperformed BB and B rated assets in both markets. In the HY Bond market, CCC rated bonds returned 7.47%, their best monthly performance since April 2016, and are now down only -1.20% YTD. In the Senior Secured Loan market, CCC rated loans returned 6.28%, their strongest monthly return since September 2009, and have turned positive year to date. The vaccine-related market euphoria was widespread, with each sector in both markets posting positive returns for the month. Transportation led the way in the high yield market, while gaming, lodging and leisure was the top performing loan sector. Broadcasting, with exposure to companies who produce live events, was also a top performer in both markets.

Key takeaways

  • Credit rallied amid broad market strength in November on news of multiple potentially viable COVID-19 vaccines.
  • HY Bonds returned 4.00% while Senior Secured Loans were up 2.23%.
  • Duration-sensitive Barclays Agg returned 0.98%, benefiting from a slight decline in rates after an early month spike.

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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