Data as of November 30, 2021, unless otherwise noted.
Performance (total returns)
| Benchmarks | November 2021 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | 0.30% | -1.29% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | -1.02% | 3.42% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | -0.16% | 4.53% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Credit markets fall in November: The emergence of the Omicron variant plus concerns over rising inflation and acceleration in a Fed tightening cycle weighed broadly on markets last month. High yield bonds were down -1.02%, the market’s second straight monthly decline and weakest performance since March 2020. Senior secured loans fared relatively better, declining -0.16%, which was also this market’s weakest performance since March 2020. As is typical in a broader risk off environment, higher rated credit declined less than the lowest rated CCC bonds and loans. Default activity remained benign, with only one default last month. The Trailing Twelve Month (TTM) default rate fell to 0.38% in the high yield market while increasing slightly to 0.83% for loans. 2021 is on track to post the lowest default volume since 2007 and levels of distress in the market remain negligible, signaling few changes to the current low default environment. Long-term interest rates declined sharply across the curve following the emergence of Omicron, as investors assessed its impact on global growth; the 10-year ended November at 1.44%. This decline boosted duration sensitive assets such as the Barclays Agg, which returned 0.30% for the month but remains down -1.29% on a year-to-date basis.
CLOs were a bright spot in credit markets last month: Collateralized loan obligations (CLOs) were a loan bright spot in credit last month, posting a roughly flat return (+0.02%), versus bonds and loans which both declined. The CLO asset class hit a major milestone earlier this year, reaching $1 trillion in market capitalization, driven by record new issuance. As the asset class becomes more mainstream, we thought it important to revisit the opportunity presented by this once-niche market. First and foremost, CLOs are floating rate, offering potential protection from duration risk, a particularly attractive quality as the Fed may be on the precipice of a tightening cycle. CLOs still trade wide to comparably rated corporate debt, suggesting the potential for further spread tightening – something that cannot be said for many areas of credit today. Plus, they offer an attractive yield premium: BBB-rated CLOs are currently yielding 4.9%, versus BBB-rated corporates which currently yield 2.56%. Said another way, an investment grade rated CLO tranche has almost double the yield of corporate bonds carrying the same rating.
Key takeaways
- Credit markets declined in November. Loans returned -0.16% while HY bonds were down -1.02%, their second monthly decline and worst performance since March 2020.
- Default activity remained benign, with only one new default. 2021 is on pace to have the lightest default activity since 2007.
- CLOs were a lone bright spot in credit last month, posting a slightly positive return.
