Credit market commentary

Credit market commentary: September 2021

Despite some modest weakness in high yield during the second half of September, we believe credit remains on solid footing for the remainder of 2021.

October 5, 2021 | 5 minute read

Data as of September 30, 2021, unless otherwise noted.

Performance (total returns)

BenchmarksSeptember 2021YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.87%-1.55%
ICE BofAML U.S. High Yield Index (HY Bonds)0.03%4.67%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.64%4.42%

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

Credit markets positive in September: High yield bonds and senior secured loans were positive in September, although performance diverged for much of the month. Both markets had a strong start before bonds traded down alongside equities for much of the second half of September amid shifting market sentiment and rising long term interest rates. Ultimately, HY managed to stay positive, up 0.03% in September, marking the asset class’s 12th straight monthly gain. CCC-rated bonds outperformed while BB-rated bonds, which tend to be the most duration-sensitive portion of the high yield market, posted a negative return for the month. Loans on the other hand rose consistently for much of September, returning 0.64%, their best showing since January. The asset class benefited from strong CLO issuance and steady retail inflows given the tendency for investors to flock to floating rate products amid rising rates. The Trailing Twelve Month (TTM) default rates in both markets fell below 1% last month, ending at 0.99% for HY and 0.89% for loans, the lowest levels since March 2014 and February 2012, respectively. Long-term interest rates rose sharply last month, hurting duration-sensitive assets such as the Barclays Agg, which was down -0.87%. The Agg has struggled all year and remains down -1.55% on a year-to-date basis.

Credit remains on solid footing for Q4: Credit markets have been characterized by steady, income-driven returns for much of the year. Despite the modest volatility in HY markets in the second half of September, we believe credit remains on solid footing to finish 2021. Economic growth remains strong, albeit decelerating, fundamentals continue to improve, technicals are supportive and the default environment remains particularly benign. Given current tight spreads, we expect returns at the index level to be driven primarily by income. This would imply roughly 1.35% return for HY and 1.02% for loans in the fourth quarter. Uncertainties are beginning to mount more broadly throughout markets, but we do not expect them to drive credit volatility in a major way. We’re closely watching the Fed’s impending pivot away from its ultra-accommodative policy as it is likely to begin tapering its asset purchases in Q4. During the 2013 taper tantrum, HY spreads widened roughly 100 bps over the course of a month before quickly retracing. The deliberate messaging this time around about timing of Fed tapering seems as to have staved off another tantrum, however, long-term interest rates have still risen in recent weeks. While bonds traded down in sympathy with equities during the second half of September, HY has historically had an empirical (observed) duration of -1.4, meaning that on average, HY prices increase as interest rates rise. In our view, these recent events and upcoming taper do little to change our view that the backdrop for credit remains favorable.

Key takeaways

  • Credit markets were positive in September. HY bonds returned +0.03%, their 12th straight monthly gain while loans were up 0.64%.
  • The duration-sensitive Barclays Agg was negative in September as long-term interest rates rose sharply.
  • Despite some modest weakness in HY during the second half of September, we believe credit remains on solid footing for the remainder of 2021.

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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