Chart of the week

As rate concerns fade, so does investor interest in loans

See how investor interest in high yield bonds and senior secured loans has shifted in what’s now a firmly accommodative environment.

March 29, 2019 | 2 minute read
High yield bond and loan prices
  • The 10-year U.S. Treasury yield reached a 15-month low this week and has declined nearly 40 bps since March 1.1 The decline has come as the Fed affirmed that it will remain on the sidelines for now and amid a fresh bout of soft economic releases in the U.S. and EU.
  • Within a now firmly accommodative environment, high yield bonds and senior secured loans have moved off their late-December lows, but have not fully recovered from the decline experienced in Q4 2018.2
  • Against this backdrop, high yield bond funds have seen YTD inflows of $12.3 billion versus the historic outflows they experienced in Q4 2018.3 High yield bonds have benefited this year as the U.S. economy continues to experience slow-but-positive growth with minimal inflation pressures and as the Fed’s shift has further compressed yields across traditional fixed income asset classes.
  • On the other hand, as rate fears have diminished, investors have exited low-duration floating rate assets. Investors withdrew nearly $1.4 billion from bank loan mutual funds during the week ended March 27 and have withdrawn approximately $9.5 billion YTD.3
  • Shifting investor sentiment over the last six months serves as a timely reminder of how market technicals (supply/demand), rather than fundamentals, can drive credit prices. The decline in credit prices occurred in the fourth quarter against the backdrop of generally strong corporate fundamentals marked by low defaults. High yield bond and senior secured loan defaults ended 2018 at 1.8% and 1.6% respectively.4
  • These periods may create opportunities for managers with the expertise and liquidity to take advantage of investments arising from the volatility and shifting investor sentiment.

  • Federal Reserve Bank of St. Louis, https://bit.ly/29ecBfp.

  • Bloomberg and Credit Suisse, as of March 28, 2019. High yield bonds are represented by the ICE BofAML U.S. High Yield Master II Index. Senior secured loans are represented by the Credit Suisse Leveraged Loan Index.

  • Thomson Reuters Lipper, as of March 22, 2019.

  • Default rates are based on data from S&P Global Market Intelligence.

The chart of the week 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 chart of the week 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 market commentary. The chart of the week 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 chart of the week 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