- After reaching a 7-year high last week, interest rates remained elevated this week.1 The 10-year U.S. Treasury yield climbed above 3.25% on Tuesday before moving slightly lower later in the week.1 The 10-year yield has climbed as high as 80 bps YTD, and as much as 16 bps of this rise came in the past 11 days.1
- The 10-year’s sudden rise has helped spur a rapid selloff across many stock and bond asset classes. As the chart shows, traditional fixed income investments have seen substantial declines this year. In just the first two weeks of October, investment grade and corporate bonds are on their way toward matching their declines of the first three quarters of 2018.2
- The decline is largely due to investment grade bonds’ sensitivity to changes in interest rates, which is significantly higher than a decade ago.3
- In contrast, senior secured loans and CLOs, which consist of a pool of underlying loans, feature significantly less interest rate risk than traditional bonds and have maintained modestly positive returns in October.3
- Amid rising rates, investing in a broad range of fixed income asset classes with varying levels of interest rate risk may help buoy a portfolio’s returns while also providing a competitive level of income.
1 Federal Reserve Bank of St. Louis, https://bit.ly/29ecBfp.
2 Bloomberg, Q4 represents the period from September 30–October 11. Investment grade bonds represented by the Bloomberg Barclays U.S. Aggregate Bond Index. Corporate bonds represented by the ICE BofAML U.S. Corporate Master Index. Senior secured loans represented by the Credit Suisse Leveraged Loan Index. CLOs represented by the JPMorgan CLOIE. High yield bonds represented by the ICE BofAML U.S. High Yield Master II Index.
3 Bloomberg, based on the duration of the Bloomberg Barclays U.S. Aggregate Bond Index, as of October 11, 2018.
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.