Credit market commentary: November 2019

Data as of November 30, 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 was positive in November: Leveraged credit markets rose in November, with Senior Secured Loans outperforming HY Bonds after posting a negative return the month before.^1,2 Senior Secured Loans benefited from a sharp deceleration in outflows from bank loan mutual funds after the U.S. Federal Reserve signaled a pause in cutting interest rates. Still, investor demand for floating-rate Senior Secured Loans has remained somewhat muted against the backdrop of three quarter-point rate cuts so far in 2019. Following 14 straight monthly outflows, bank loan mutual fund AUM has declined from a little over $108 billion to $67 billion.³ While new collateralized loan obligation formation has more than made up for this decline in demand, withdrawals from bank loan mutual funds have been a drag on Senior Secured Loan price appreciation for much of 2019.⁴ HY Bond returns were impacted by a small outflow from HY Bond mutual funds and higher-than-average new issue volume in November, with B rated bonds providing the bulk of returns.⁴ After recording a positive return in October, the Barclays Agg reversed course and posted a slightly negative return in November.⁵ Benefiting from its high duration, the Barclays Agg has gained this year as Treasury yields have declined across the curve.

High-rated credit continues to outperform: Lower-rated credits were a drag on leveraged credit returns in November, continuing a trend that has persisted throughout much of 2019. Last month, CCC rated bonds and CCC rated Senior Secured Loans returned 2.21% and -0.47%, respectively.^6,7 By comparison, BB rated bonds and BB rated Senior Secured Loans returned 0.56% and 0.52%, respectively.^8,9 For added context, BB rated bonds have generated a year-to-date return of 14.30%, while CCC rated bonds have generated a year-to-date return of just 3.28%. The distribution of returns continues to highlight the effect of moderating U.S. economic growth and the increased risk aversion shown by investors in recent months. Notably, B rated bonds and B rated loans proved to be the sweet spot for investors seeking value in the leveraged credit market in November. Following four months of widening, CCC rated bond yields stood at 13.08% as of November 30, 2019.⁶ By comparison, B rated bond yields ended November at 5.96%.¹⁰

Key takeaways

• Leveraged credit rose in November, with loans outperforming HY Bonds.
• The duration-sensitive Barclays Agg was unable to recover from an early-month rate spike, ending down slightly on the month.