Credit market commentary: December 2019

Data as of December 31, 2019 unless otherwise noted

Performance (total returns)

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

Leveraged credit rally rolls on: Leveraged credit markets rallied to end 2019, with HY Bonds and Senior Secured Loans rising sharply in December.^1,2 HY Bonds recorded their seventh straight monthly gain and their highest monthly return since June amid rising U.S. equity prices, easing trade concerns and increased investor demand for risk assets. HY Bond returns benefited from another net monthly mutual fund inflow and increased willingness by investors to reach down the ratings spectrum in search of yield. Notably, CCC rated bonds rallied sharply in December after underperforming higher-rated credits throughout most of 2019. Senior Secured Loans recorded their strongest returns since April despite another outflow from bank loan mutual funds. Following 15 straight monthly outflows, bank loan mutual fund AUM has declined from a little over $108 billion to less than $67 billion as investor demand for floating-rate Senior Secured Loans has been tempered by three quarter-point rate cuts by the U.S. Fed in 2019.³ Meanwhile, the Barclays Agg posted another slightly negative monthly return in December.⁴ Benefiting from its high sensitivity to duration, the Barclays Agg appreciated significantly through the first eight months of this year but stalled during the fourth quarter as U.S. Treasury yields remained relatively rangebound.

Lower-rated credit outperforms: In a sharp reversal of a trend that had persisted through most of 2019, lower-rated credits significantly outperformed higher-rated credits in December. Last month, CCC rated bonds and CCC rated Senior Secured Loans returned 5.65% and 3.24%, respectively, as investors showed increased willingness to migrate down the ratings spectrum in search of higher-yielding investments.^5,6 By comparison, BB rated bonds and BB rated Senior Secured Loans returned 1.25% and 0.88%, respectively.^7,8 As noted last month, the spread differential between CCC rated bonds and BB rated bonds had widened to its highest level since 2016 by the end of November, perhaps signaling that certain CCC rated bonds had become undervalued amid trade-related concerns and the effect of moderating U.S. economic growth. Tightening sharply last month, CCC rated bond yields stood at 11.80% as of December 30, 2019, down from 13.08% the month before.⁹ Despite their rally to end the year, CCC rated bonds underperformed in 2019. For context, BB rated bonds generated an annual return of 15.73%, while CCC rated bonds generated an annual return of 9.11%.

Key takeaways

• December was a strong month for leveraged credit, with HY Bonds and Senior Secured Loans posting returns of 2.09% and 1.60%, respectively.
• The duration-sensitive Barclays Agg ended down slightly on the month.