Data as of May 31, 2020 unless otherwise noted.
Performance (total returns)
| Benchmarks | May 2020 | YTD |
| Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) | 0.47% | 5.47% |
| ICE BofAML U.S. High Yield Index (HY Bonds) | 4.57% | -5.70% |
| S&P/LSTA Leveraged Loan Index (Senior Secured Loans) | 3.80% | -5.68% |
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 continued in May: The dichotomy between financial markets and weak economic data continued throughout May. An optimistic sentiment was apparent as all 50 states have now taken some steps toward reopening their economies. Early in the month, the Federal Reserve began implementing some its previously announced stimulus measures including purchases of investment grade and HY Bond ETFs. While total purchases were small, this boosted confidence for a second straight month as HY Bonds returned 4.57%, their best month since January 2019, and Senior Secured Loans had another strong month, returning 3.80%. Investors continued to pour money into HY Bonds at a record pace. These inflows have been met by heightened new issuance, which is now up 37% year over year. Loans continued to see outflows for much of the month, although at a slower pace than in 2019. Lower-rated credit in both markets outperformed higher-rated (BB) issues, a sign that investors seem to have gained more conviction in the rally. However, year to date, the lowest-rated CCC issues are still clear laggards.
Structured products catch up to broader credit: Sweeping fiscal and monetary stimulus measures have aided markets since late March. However, having been excluded from many of the initial measures, structured products had lagged the broader credit rally. On May 12, the Federal Reserve announced an easing of restrictions for the previously announced Term Asset-Backed Securities Loan Facility (TALF) program which now more directly supports the CLO market. Initially, to qualify for TALF, the collateral underlying CLOs was limited to newly issued loans. With new issuance in the loan market stymied for much of March, this restriction excluded much of the market. The Fed’s recent amendment allows for collateral-backing CLOs to include loans originated after January 1, 2019, which broadens the pool of eligible collateral. The secondary market for CLOs was also boosted this month amid broader strength in the Senior Secured Loan market and generally improved sentiment for structured products. An index tracking CLOs returned 4.03%, its strongest monthly return since its creation on January 1, 2012.
Key takeaways
- Steps to reopen the economy and progress toward a COVID-19 vaccine created an optimistic sentiment for much of the month, as HY Bonds, Senior Secured Loans and structured products posted strong returns.
- Interest rates remained relatively rangebound and the duration-sensitive Barclays Agg had a slight gain.
