Credit market commentary

Credit market commentary: September 2018

Strong corporate and economic data caused high yield bonds and senior secured loans to rally. High duration portfolios, like the Barclays Aggregate, continued to struggle amid rising rates. High yield bonds generated their strongest quarterly return since Q1 2017.

October 12, 2018 | 4 minute read

Data as of September 30, 2018 unless otherwise noted

Performance (total returns)

BenchmarksSeptember 2018YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.64%-1.60%
ICE BofAML U.S. High Yield Master II Index (HY Bonds)0.58%2.50%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.69%4.03%

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 up again in September: The leveraged credit markets rose in September, once again benefiting from solid corporate fundamentals and stronger U.S. economic data. HY Bonds posted their fourth straight monthly gain and Senior Secured Loans recorded their 14th monthly gain over the past 15 months. HY Bonds returned 0.58% in September, building on the gains of July and August, as U.S. equities hit record highs.1 HY Bonds generated a total return of 2.44% in the third quarter of 2018, the strongest quarterly return since the first quarter of 2017.1 Senior Secured Loans returned 0.69% in September, outpacing HY Bonds for the first time in three months, likely benefiting from their floating rate coupons and potential hedge against rising interest rates.2,3 Year to date, Senior Secured Loans have outperformed both HY Bonds and other higher-duration fixed income investments. For example, the Barclays Agg returned -0.64% in September and remains negative in 2018 due in part to the index’s higher sensitivity to interest rates.3

Treasury yields rise on strong economic data: The yield on the U.S. 10-year Treasury note rose above 3% in September as a mix of strong U.S. growth, rising wages and low unemployment sent long-term yields briefly near a seven-year high.4 By month’s end, U.S. 10-year Treasury yields were approximately 3.06%, compared to 2.41% at the outset of the year.4 The U.S. 2-year Treasury note yield, which is more sensitive to U.S. Federal Reserve rate expectations, rose to a 10-year high of 2.8%.4 The rise in Treasury yields contributed to the underperformance of the Barclays Agg, which experienced declines due to its relatively high allocation to U.S. Treasuries and other higher-duration investments. Both HY Bonds and Senior Secured Loans have outperformed the higher-duration Barclays Agg so far this year. Senior secured loans, which have floating rate coupons, have particularly benefited from the rise in interest rates, outperforming both high yield bonds and the Barclays Agg in 2018.

Key takeaways

  • Strong corporate and economic data caused high yield bonds and senior secured loans to rally.
  • High-duration portfolios, like the Barclays Agg, continued to struggle amid rising rates.
  • HY Bonds generated their strongest quarterly return since Q1 2017.

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

  • 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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