Credit market performance diverged in December. High yield bonds started the month higher on optimism that inflation may be cooling before hawkish Fed rhetoric weighed on the asset class over the latter half of December.

Amidst broad market volatility and record outflows, HY Bonds and Senior Secured Loans fell in December. 10-year Treasury rates fell as investors sought safety in government bonds.

December was a strong month for leveraged credit, with HY Bonds and Senior Secured Loans posting returns of 2.09% and 1.60%, respectively. The duration-sensitive Barclays Agg ended down slightly on the month.

Bonds were tested by a sharp interest rate spike and declined slightly alongside equities over the last two weeks of February but remained positive on the month, returning 0.35%. Loan prices remained firm, as the asset class outperformed bonds, returning 0.59%.

January’s volatility spilled into February with most major asset classes posting another monthly decline. Continuing concerns over inflation, interest rate volatility and the impending Fed tightening cycle weighed on markets to start the month before focus shifted squarely to geopolitical tensions.

Investments with lower durations, such as senior secured loans, have outperformed so far in 2018 and may display lower levels of volatility if U.S. Treasury yields rise further.

Credit markets continued their fast start to the year, posting solid returns in February. The duration-sensitive Barclays Agg declined modestly, underperforming credit indices.

The last week of February saw a global sell-off in risk assets as markets reacted to news of the coronavirus. Leveraged credit markets slid alongside a steeper drop in equities. The Barclays Agg benefited from its long duration, returning 1.80% as rates hit all-time lows during the month.

Credit markets rose through the first few weeks of the month on stimulus optimism and firm technicals in the loan market. However, equity volatility weighed on both asset classes in January’s final week

It was a volatile start to the year for most major asset classes. Ongoing COVID concerns, elevated inflation, rising interest rates and a hawkish Fed roiled markets for much of the month.