Credit market commentary

Credit market commentary: October 2021

Credit markets were mixed in October. Loans returned 0.27% while HY bonds ended their 12-month streak of gains, down 0.18%.

November 10, 2021 | 5 minute read

Data as of October 31, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksOctober 2021YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.03%-1.58%
ICE BofAML U.S. High Yield Index (HY Bonds)-0.18%4.49%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.27%4.70%

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

Credit markets mixed in October: Senior secured loans returned 0.27% while high yield bonds were negative, down 0.18%, which ended their 12-month streak of gains. Consistent with typical behavior during down markets, CCC-rated bonds were the worst performers, losing 0.37%. However, CCC-rated loans also underperformed their higher-rated peers, down 0.26%, their worst month since March 2020, suggesting a slight air of caution in the loan market. The Trailing Twelve Month (TTM) default rate in both markets fell once again last month, ending at 0.44% for HY and 0.69% for loans, the lowest levels since December 2007 and February 2012, respectively. Despite modest interest rate volatility, high yield bond funds saw $1.3 billion of inflows during the month, including the two largest weekly inflows into the asset class since April. Loan funds continued to draw investor dollars; the asset class has seen inflows in 41 out of 42 weeks this year. Long-term interest rates rose for much of the month, with the 10-Year Treasury peaking at 1.70%, its highest close since April, before receding slightly during the last week of October. The largest moves came in the shorter-dated tenors, with the 5-Year Treasury up 22 bps last month. This rate volatility weighed on duration-sensitive assets like the Barclays Agg, which posted a slightly negative return in October, down 0.03%. The Agg has struggled all year and remains down 1.58% on a year-to-date basis.

LIBOR transition rapidly approaching: Global markets have been preparing for the shift away from LIBOR for nearly a decade. As the year-end 2021 deadline approaches, we’re closely monitoring potential impacts on the floating rate loan and CLO markets. The first SOFR-based leveraged loan was priced in early October with five additional loans tied to SOFR following suit. These issues have thus far been routine, and we believe that the transition away from LIBOR will largely be a non-event in the loan market. We are assessing potential implications for the CLO market and believe the impact will be predominantly felt by those invested in equity tranches. CLO managers will be principally concerned with basis risk, or the mismatch between the floating rate paid to debtholders and the rate received on their collateral pool. There could, and will likely exist, a period during which CLO liabilities are linked to LIBOR while collateral assets are tied to SOFR. Given spreads between the two reference rates, this could impact arbitrage for equity investors (i.e. if SOFR is less than LIBOR, CLOs will receive less interest while still paying the higher LIBOR rate). A potential immediate impact could be elevated CLO issuance for the remainder of this year as managers look to issue CLOs with both collateral pools and liabilities tied to LIBOR.

Key takeaways

  • Credit markets were mixed in October. Loans returned 0.27% while HY bonds ended their 12-month streak of gains, down 0.18%.
  • CCC-rated assets in each market were the worst performers, suggesting a slight air of caution throughout credit.
  • We are closely monitoring the transition away from LIBOR, set to occur at year end. While we believe this will largely be a non-event, we see some potential impacts on CLO equity investors.

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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