- With a total return of more than 17%, high yield bonds generated one the highest returns among major asset classes in 2016.1 The rally has continued into 2017 as the asset class has returned approximately 1.3% year to date.2
- Following such a sustained strong performance, high yield bonds’ yield advantage over senior secured loans, which has averaged 79 basis points since January 2010, has since declined to approximately 13 basis points.3 This is from a peak yield differential of nearly 300 basis points in late January 2016.3
- Traditionally, high yield bonds have offered investors a yield advantage over senior secured loans due to the varying risk profiles of the two asset classes.
- Specifically, senior secured loans are senior within the capital structure, meaning that investors in these loans are generally first to be repaid in the event of a corporate restructuring. Further, senior secured loans are generally secured by an issuer’s assets, or collateral, and may offer a coupon that floats with interest rate movements.
- High yield bonds feature fixed rate coupons and are often unsecured and subordinated in the capital structure.
1 High yield bonds are represented by the Bank of America Merrill Lynch U.S. High Yield Index relative to the S&P 500 Index, Russell 2000 Index and Bank of America Merrill Lynch U.S. Investment Grade Index.
2 Bank of America Merrill Lynch U.S. High Yield Index.
3 Based on the yield for the J.P. Morgan High Yield Bond Index less the J.P. Morgan Leveraged Loan Index.
The Alternative Thinking Week in Review market commentary and any accompanying data (“Market Commentary”) is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The 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 Market Commentary. The 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 Market Commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.