Credit market commentary

Credit market commentary: October 2018

Credit indices fell alongside equities in October, while rising interest rates weighed heaviest on the Barclays Agg. Equities and high yield credit declined in a volatile trading month. Senior Secured Loans generally held steady and captured upside to October’s rising rates, which caused the Barclays Agg to trade down.

November 13, 2018 | 4 minute read

Data as of October 31, 2018 unless otherwise noted

Performance (total returns)

BenchmarksOctober 2018YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.79%-2.38%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)-1.60%0.85%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)-0.03%4.00%

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

High yield bonds and senior secured loans lower in volatile October: U.S. equity volatility spilled into the leveraged credit markets in October, with HY Bonds declining the most since January 2016. Against the backdrop of a 6.8% decline in the S&P 500, HY Bonds posted their first monthly decline in five months. HY Bonds returned -1.60% in October, erasing some of the gains experienced during the third quarter, even as fundamentals remained stable and supply from new high yield bond issuance declined.1,2 Senior Secured Loans returned -0.03% in October, outpacing high yield bonds and investment grade bonds, likely benefiting from their floating rate coupons and senior position.1,3 Year to date, Senior Secured Loans have outperformed both HY Bonds and other higher-duration fixed income investments by a relatively wide margin. For example, the Barclays Agg returned -0.79% in October and remains negative in 2018 due, in part, to the index’s higher sensitivity to interest rates.4

Treasury yields rise despite equity volatility: The yield on the 10-year Treasury note rose to a seven-year high in early October and remained above 3.0% throughout the month as a mix of strong U.S. growth, rising wages and low unemployment weighed on Treasury prices. By month end, 10-year Treasury yields were approximately 3.14%, compared to 2.41% at the outset of the year.5 The 2-year Treasury note yield, which is more sensitive to Federal Reserve rate expectations, rose near 2.9% even as equity volatility and geopolitical concerns had investors seeking out the safety of Treasuries at various times throughout the month.4 The rise in Treasury yields contributed to the underperformance of the Barclays Agg, which experienced declines alongside U.S. equities and other risk assets due, in part, to its high allocation to Treasuries and other higher-duration investments.

Key takeaways

  • Credit indices fell alongside equities in October, while rising interest rates weighed heaviest on the Barclays Agg.
  • Equities and high yield credit declined in a volatile trading month.
  • Senior Secured Loans generally held steady and captured upside to October’s rising rates, which caused the Barclays Agg to trade down.

  • ICE BofAML U.S. High Yield Master II Index.

  • S&P Leveraged Commentary & Data.

  • S&P/LSTA Leveraged Loan Index.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

  • Federal Reserve Bank of St. Louis.

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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