Credit market commentary

Credit market commentary: September 2023

Credit markets were mixed in September as investors increasingly accepted that rates may remain elevated for an extended period.

October 16, 2023

Data as of September 30, 2023, unless otherwise noted.

Performance (total returns)

BenchmarksSeptember 2023 YTD
Bloomberg U.S. Aggregate Bond Index (Bloomberg Agg)-2.54% -1.21%
ICE BofAML U.S. High Yield Index (HY Bonds)-1.16% 5.97%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.96% 10.16%

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

Key takeaways

  • Credit markets were mixed in September as investors increasingly accepted that rates may remain elevated for an extended period. High yield bonds returned -1.16% while senior secured loans returned 0.96%. Both indexes were again led by CCC-rated securities, which tend to be less sensitive to rising rates.
  • Corporate fundamentals remain firm. Low leverage and high levels of interest coverage provide a solid underpinning for credit markets while default rates remain well below their long-term averages. Yet softening earnings among high yield issuers suggest a note a caution may be warranted.

Credit markets mixed in September: Markets adjusted to a clear higher-for-longer pivot by Fed policymakers in September as the Agg (-2.54%) sold off while less duration-sensitive high yield bonds saw a milder decline of approximately -1.2%. At 0.96%, loans outperformed high yield bonds by the largest amount since August 2022. Amid the elevated yield environment, both indexes have generated strong year-to-date returns of 5.7% and 10.1%, respectively. High yield spreads widened modestly in September amid heightened equity volatility while loan spreads briefly touched their lowest point over the past year driven by continued institutional demand. Lower-rated bonds tend to be less duration-sensitive and therefore continued to outperform amid September’s rising-rate environment. CCC bonds returned -0.6% compared to -0.98% and -1.44% for B and BB bonds. CCC loans returned 1.59% in September versus 0.63% for BB loans.

September finally saw the credit market start to open for new issuance after several months of below average primary market activity. High yield issuance of $24.6 billion was the highest monthly issuance since Jan. 2022. YTD issuance of $136.6 billion is well above the $90.0 billion of issuance over the same period last year. Driven by a recent surge in refinancing/repricing activity, loan issuance rose to $58.1 billion in September, which marks the most activity since February 2023’s $48.8 billion of issuance. Demand for senior secured loans has steadily improved as inflows totaled approximately $48 million and $582 million in August and September, respectively, following five consecutive months of net outflows. On the other hand, high yield bonds have seen outflows of approximately -$1.6 billion and -$2.4 billion in August and September, respectively amid equity volatility and a high-for-longer reset.

Credit fundamentals remain firm, caution may be warranted: Strong corporate fundamentals, particularly low levels of leverage and high levels of interest coverage, have provided a firm underpinning for credit markets. Additionally, high yield bond and senior secured loan default rates of 2.11% and 2.66%, respectively, remain well below their long-term averages of 3.2% and 3.1%. However, Q2 saw the first year-over-year earnings decline in high yield and the weakest growth in loans since 2020. While companies are entering this period of softer earnings from a solid base, a note of caution may be warranted should these statistics see any material deterioration. For now, credit issuers appear positioned well to absorb slower economic growth.

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.

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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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