Credit market commentary

Credit market commentary: September 2019

Leveraged credit rises in September | Fundamentals and technicals balanced for now

October 3, 2019 | 2 minute read

Data as of September 30, 2019 unless otherwise noted

Performance (total returns)

BenchmarksSeptember 2019YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg)-0.53%8.52%
ICE BofAML U.S. High Yield Index (HY Bonds)0.32%11.50%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans)0.47%6.79%

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Leveraged credit rises in September: Leveraged credit markets rose in September, with Senior Secured Loans slightly outperforming HY Bonds.1,2 Senior Secured Loans benefited from a deceleration in outflows from bank loan mutual funds and ongoing institutional demand as investors continue to seek out higher-yielding investments. Notably, the market for Senior Secured Loans has recently shifted from one of excess supply to one of excess demand, which has supported prices. HY Bonds also benefited from favorable technicals as HY Bond mutual funds experienced $4.9 billion in inflows during September.³ After accounting for September’s large inflow, inflows into HY Bond mutual funds total more than $15.8 billion in 2019. By contrast, investors have pulled nearly $27.9 billion from bank loan mutual funds so far this year as demand for floating-rate investments declined somewhat amid declining U.S. Treasury yields and diminished inflation expectations. After recording a healthy gain the month prior, the Barclays Agg turned negative in September as long-term U.S. Treasury yields rebounded from the lows experienced in August.⁴

Fundamentals and technicals balanced for now: Following 12 straight monthly outflows, bank loan mutual fund AUM has declined from a little over $108 billion to $71.5 billion.³ While new collateralized loan issuance and repayments of existing loans have made up for this decline in demand, Senior Secured Loan price appreciation has been limited in our view by selling pressure from this corner of the market.⁵ HY Bonds, conversely, have benefited from declining interest rate expectations as investors have sought out higher-yielding, fixed-rate investments. HY Bond yields ended the month at 5.87%, while spreads over Treasuries ended the month at 4.20%.⁶ This excess yield, combined with stable corporate fundamentals and a benign corporate default environment, may continue to underpin demand for HY Bonds.⁷ However, further outflows from bank loan mutual funds may continue to limit price appreciation for Senior Secured Loans, with coupons expected to account for much of the anticipated returns through the remainder of the year.

Key takeaways

  • Leveraged credit rose in September with loans outperforming HY Bonds.
  • The duration-sensitive Barclays Agg was unable to recover from an early-month rate spike, ending down 53 basis points.

  • S&P/LSTA Leveraged Loan Index.

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

  • Refinitiv Lipper.

  • Bloomberg Barclays U.S. Aggregate Bond Index.

  • S&P Leveraged Commentary & Data.

  • ICE BofAML U.S. High Yield Master II index (yield-to-worst).

  • J.P. Morgan Default Monitor, 10/1/2019.

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site