Data as of July 31, 2018 unless otherwise noted.

PERFORMANCE
BENCHMARKS JULY 2018 YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) 0.02% -1.59%
ICE BofAML U.S. High Yield Master II Index (HY Bonds) 1.12% 1.19%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans) 0.74% 2.91%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

High yield bonds and senior secured loans rally in July: The leveraged credit markets rallied in July, with HY Bonds and Senior Secured Loans posting their strongest monthly gains in 12 months and six months, respectively. HY Bonds outperformed Senior Secured Loans for the second straight month, but just the third time over the past 10 months. HY Bonds returned 1.12% in July despite ongoing concerns about global trade disputes.1 Investor fund flows turned positive in July, with high yield bond mutual funds recording only their second monthly inflow over the past 10 months.2 Senior Secured Loans posted their second strongest monthly gain of 2018 and have now posted only one month of negative returns over the last 13 months.3 Fund flows remained positive in July, and bank loan mutual funds have now pulled in nearly $13.4 billion year to date.2 Senior Secured Loans continue to outperform HY Bonds in 2018 and are outperforming other higher-duration fixed income investments by an even wider margin. For perspective, the Barclays Agg returned just 0.02% in July and is negative through the first seven months of 2018 due, in part, to the index’s higher sensitivity to rising interest rates.4

U.S. 10-year yields push back toward 3%: The yield on the U.S. 10-year Treasury note pushed back toward 3% by month end amid an improved U.S. economic outlook and waning tariff concerns. By month end the U.S. 10-year Treasury yield rose to approximately 2.98%, its highest level in more than a month.5 The U.S. 2-year Treasury note yield, which is more sensitive to U.S. Federal Reserve rate expectations, rose sharply in July and is now up approximately 80 basis points since the beginning of the year.5 As a result, higher-duration investments have generally underperformed. For example, higher-duration BB bonds have generated a year-to-date return of -0.66%, while lower-duration CCC bonds have generated a year-to-date return of 5.43%.6 More broadly, both the HY Bonds and Senior Secured Loans asset classes have outperformed the higher-duration Barclays Agg throughout 2018.

KEY TAKEAWAY

HY Bonds and Senior Secured Loans outperformed the Barclays Agg as retail inflows supported the leveraged credit markets on the back of strong monthly returns for U.S. equities.


1 ICE BofAML U.S. High Yield Master II Index.
2 Thomson Reuters Lipper.
3 S&P/LSTA Leveraged Loan Index.
4 Bloomberg Barclays U.S. Aggregate Bond Index.
5 Federal Reserve Bank of St. Louis.
6 ICE BofAML U.S. High Yield BB Rated Index, ICE BofAML U.S. High Yield CCC & Lower Rated Index.


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 Index is designed to track the performance of U.S. dollar-denominated below investment grade corporate debt publically 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.


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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.