Credit market commentary

Credit market commentary: November 2021

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.

December 3, 2021 | 5 minute read

Data as of November 30, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksNovember 2021YTD
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.

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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