Data as of October 31, 2020 unless otherwise noted.
Performance (total returns)
| Benchmarks | October 2020 | YTD |
| 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%.
