Credit market commentary

Credit market commentary: November 2022

Markets broadly rallied once again in November on early signs inflation may be cooling and the Fed may soon slow its aggressive pace of rate hikes.

December 7, 2022

Data as of November 30, 2022, unless otherwise noted.

Performance (total returns)

BenchmarksNovember 2022YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)3.68%-12.62%
ICE BofAML U.S. High Yield Index (HY Bonds)1.87%-10.54%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.24%-1.04%

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

Credit markets rallied in November: Markets broadly rallied once again in November on early signs inflation may be cooling and the Fed may soon slow its aggressive pace of rate hikes. Equities returned 5.59% while high yield bonds gained 1.87%, and senior secured loans were up 1.24%. Despite the positive market sentiment, the lowest rated CCC bonds and loans once again lagged their higher-rated peers, indicating investors remain wary of the economic outlook. The divergence in performance between higher- and lower-rated assets has been especially apparent in the loan market this year, where BB loans have outperformed CCC loans by 13.39%. While high yield (HY) investors have preferred higher quality assets—especially over the second half of the year—B-rated bonds, which are the top performer in the HY market, have outperformed CCCs by 6.15%. Treasury yields fell last month on positive inflation data and expectations for a lower terminal Fed funds rate. The 10-year U.S. Treasury yield fell roughly 44 basis points, boosting the duration sensitive Bloomberg Aggregate Bond, which posted only its third positive monthly performance this year, up 3.68%. There were no defaults in November for the second straight month; however, four distressed exchanges caused the trailing 12-month default rate to tick up slightly in each market, ending at 1.61% for high yield bonds and 1.59% for senior secured loans. 2022’s default volume remains low from a historical standpoint. The long-term average default rates for high yield and loans are 3.2% and 3.1%, respectively.

Investors pour money into high yield bond funds: Senior secured loans were the asset class of choice for much of 2021 and Q1 2022, as investors flocked to products with floating rate coupons, shunning fixed rate assets amid rising interest rates. Since May, however, when concerns over economic growth emerged, dynamics have reversed. Senior secured loan funds have now seen seven consecutive months of outflows as investors appear wary of credit risk in this relatively lower quality market. High yield bond funds, on the other hand, have seen near-record inflows in recent weeks, as attractive entry prices, rising yields and a ratings composition that is skewed toward higher quality assets have improved the relative appeal of bonds versus loans. Investors poured $13.5 billion into the asset class over the past five weeks, the largest volume since the period immediately following the acute COVID-19 selloff in March 2020.

Key takeaways

  • Credit rallied last month alongside broader markets. High yield rose 1.87% while floating rate senior secured loans gained 1.24%.
  • Declining long-term rates boosted the duration sensitive Barclays Agg, which posted only its third positive monthly return this year, up 3.68% in November.
  • Loan funds have seen seven consecutive months of outflows while investors have poured money into high yield bond funds in recent weeks.

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.

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