Credit market commentary

Credit market commentary: October 2019

Leveraged credit was mixed in October | High-rated credit continues to outperform

November 6, 2019 | 3 minute read

Data as of October 31, 2019 unless otherwise noted

Performance (total returns)

BenchmarksOctober 2019YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)0.30%8.85%
ICE BofAML U.S. High Yield Index (HY Bonds)0.23%11.76%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)-0.45%6.31%

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 mixed in October: Leveraged credit markets were mixed in October, with HY Bonds posting their fifth straight monthly rise and Senior Secured Loans posting a moderate negative return.1,2 HY Bonds benefited from continued investor demand and below-average new issue volume as HY Bond mutual funds recorded another $2.5 billion in inflows in October.³ After accounting for last month’s inflow, flows into HY Bond mutual funds now total more than $18.7 billion in 2019, marking the largest annual inflow since 2012. Against the backdrop of three quarter-point rate cuts by the Fed this year, investor demand for floating-rate Senior Secured Loans remained muted in October, with outflows from bank loan mutual funds accelerating slightly. Following 13 straight monthly outflows, bank loan mutual fund AUM has declined by roughly one-third from a little over $108 billion to $68 billion.³ While new collateralized loan issuance remains robust and has made up for this decline in demand, Senior Secured Loan price appreciation has been limited by selling from this part of the market.⁴  After declining in September, the Barclays Agg posted a slightly positive return in October.⁵ Benefiting from its high sensitivity to duration, the Barclays Agg has gained this year as Treasury yields have declined across the curve.

High-rated credit continues to outperform: Higher-rated segments of the leveraged credit markets generally outperformed their lower-rated peers during October, continuing a trend that has persisted throughout much of 2019. Last month, BB rated bonds and BB rated Senior Secured Loans returned 0.55% and -0.02%, respectively.6,7 By comparison, CCC rated bonds and CCC rated Senior Secured Loans returned -0.49% and -1.34%, respectively.8,9 For added context, BB rated bonds have generated a year-to-date return of 13.67%, while CCC rated bonds have generated a year-to-date return of 5.61%. The distribution of returns highlights the effect of moderating U.S. economic growth and the increased risk aversion shown by investors in recent months. Following three months of widening, CCC rated bond yields stood at 12.45% as of October 30, 2019, while spreads over Treasuries ended the month at 1,085 bps – near the widest levels of 2019. By comparison, BB rated bond yields and spreads over Treasuries ended October at 4.14% and 254 bps, respectively. The yield premium between CCC rated bonds and BB rated bonds has widened by over 100 bps over the past 10 months and is currently at its widest level since 2016.

Key takeaways

  • Leveraged credit was mixed in October, with HY Bonds slightly positive and loans slightly negative.
  • The duration-sensitive Barclays Agg benefited when rates fell late month, posting a positive return.

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

  • S&P/LSTA Leveraged Loan Index.

  • Refinitiv Lipper.

  • S&P Leveraged Commentary and Data.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

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

  • S&P/LSTA BB Rated Loan Index.

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

  • S&P/LSTA CCC Rated Loan Index

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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