Credit market commentary

Credit market commentary: May 2020

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.

June 4, 2020 | 3 minute read

Data as of May 31, 2020 unless otherwise noted.

Performance (total returns)

BenchmarksMay 2020YTD
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.

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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