Data as of September 30, 2020 unless otherwise noted.
Performance (total returns)
| Benchmarks | September 2020 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | -0.05% | 6.98% |
| ICE BofAML U.S. High Yield Master II Index (HY Bonds) | -1.04% | -0.30% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 0.63% | -0.66% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Leveraged credit mixed in September: Credit markets were mixed in September with HY Bonds posting a negative return, down -1.04%, while Senior Secured Loans returned 0.63%. This marks the first setback for HY Bonds since March, when the market recovery began in earnest. Notably, as we saw in the early stages of the market sell-off in February, HY Bonds followed equity volatility rather than leading the charge. What was initially a tech-led sell-off became more broad-based as concerns over rising COVID cases, dwindling prospects of further stimulus, and election-related uncertainty spooked markets. Senior Secured Loans, which were briefly positive on a year-to-date basis in early September, were not completely immune to the risk-off sentiment, joining HY Bonds in their decline for much of the back half of the month. Default rates in both markets held steady for the second month in a row and remained at or near 10-year highs. Interest rates were relatively rangebound throughout the month, and without the benefit of a higher yields to cushion price fluctuations, the duration-sensitive Barclays Agg posted its second consecutive negative monthly return. This is especially noteworthy as this proxy for core fixed income failed to hedge equities, which also declined.
A tale of two markets: September’s mixed results for HY Bonds and Senior Secured Loans highlight some of the nuances that exist between these relatively similar-seeming asset classes. Supply and demand technicals were a dominant force in both markets but caused different results in each. The loan market saw a supply shortage for the first time since August 2019 as CLO issuance increased markedly during the month. As the largest purchaser of senior secured loans, CLOs are a key source of demand, and this heightened issuance put upward pressure on loan prices. HY Bonds on the other hand experienced a significant supply surplus. HY bonds continue to be the financing source of choice for many companies, and September’s issuance was the fifth largest volume on record. Year to date, HY bond funds have seen massive inflows to meet this heightened supply, but amid market volatility in September, investors withdrew $4.3 billion from bond funds this month. While both markets are sensitive to the broader economic backdrop and market environment, nuances still exist among them. We believe this benefits active managers that can seek arbitrage opportunities across both markets.
Key takeaways
- Credit markets were mixed in September, with HY Bonds posting a -1.04% return and Senior Secured Loans returning 0.63%.
- Interest rates remained relatively rangebound throughout the month and the duration-sensitive Barclays Agg returned -0.05%, its second straight monthly decline.
