Credit market commentary

Credit market commentary: December 2019

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.

January 8, 2020 | 2 minute read

Data as of December 31, 2019 unless otherwise noted

Performance (total returns)

BenchmarksDecember 2019YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.07%8.72%
ICE BofAML U.S. High Yield Index (HY Bonds)2.09%14.41%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)1.60%8.64%

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.

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

  • S&P/LSTA Leveraged Loan Index.

  • Refinitiv Lipper.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

  • ICE BofAML U.S. CCC Rated Bond Index.

  • S&P/LSTA CCC Rated Loan Index.

  • ICE BofAML U.S. BB Rated Bond Index.

  • S&P/LSTA BB Rated Loan Index.

  • ICE BofAML U.S. CCC Rated Bond Index (yield-to-worst).

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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