Credit market commentary

Credit market commentary: October 2020

Credit markets remained positive in October, despite experiencing weakness during the last week of the month alongside a sell-off in equities.

November 4, 2020 | 5 minute read

Data as of October 31, 2020 unless otherwise noted.

Performance (total returns)

BenchmarksOctober 2020YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.45%6.32%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)0.47%0.17%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.20%-0.46%

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

Leveraged credit positive in October: Credit markets posted positive returns in October despite a late-month slide in both markets, with HY Bonds returning 0.47% and Senior Secured Loans returning 0.20%. Continued news of rising COVID cases, fresh lockdown measures in Europe and fading hopes for further stimulus roiled equities for much of October, with the S&P 500 ending the month down -2.7%; notably, this was the second straight monthly decline for equities. HY Bonds and Senior Secured Loans generally performed well for much of the month despite the broader weakness but ultimately declined alongside equities in the last week of October. Investors pulled $2.5 billion from high yield funds amid this weakness, adding technical pressure to the market. New issuance for both high yield bonds and loans was steady, as companies looked to lock in financing ahead of the election. The HY default rate increased to 6.87%, the highest level since 2010, after two straight months of declines, while the loan default rate decreased slightly to 4.30%. The duration-sensitive Barclays Agg posted its third straight monthly decline as rates edged steadily higher throughout October. Notably, this proxy for core fixed income once again failed to hedge against declining equities.

A tale of two markets: The broad HY Bond index is now slightly positive year to date, and Senior Secured Loans are hovering near a positive year-to-date return. Looking below the surface, however, shows heightened dispersion among ratings and industries. In a typical market recovery, higher-rated credit generally rebounds first with lower-rated assets following. While the current recovery initially took this path, lower-rated assets continue to lag and are drastically underperforming their higher-rated counterparts year to date. CCC rated HY bonds are down -8.07% while CCC rated loans are down -8.80% this year. This compares to returns of 3.24% for the highest-rated BB bonds and -1.96% for BB loans. Heightened dispersion also exists at the industry level. There are only two industries in both the high yield and loan markets (telecom and retail in the HY market and retail and energy in the loan market) with spreads currently tighter than pre-pandemic levels. While many of the industries trading at the widest spreads have been the most impacted by the pandemic and the associated economic fallout, active managers with the flexibility to invest across asset classes and capital structures may find idiosyncratic opportunities in companies that have been punished alongside their broader industries or ratings.

Key takeaways

  • Credit markets remained positive in October, despite experiencing weakness during the last week of the month alongside a sell-off in equities.
  • HY Bonds returned 0.47% while Senior Secured Loans were up 0.20%.
  • Rates edged higher, even during the broad risk-off market sentiment, sending the Barclays Agg down -0.45%.

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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