Data as of November 30, 2018 unless otherwise noted.

PERFORMANCE
BENCHMARKS NOVEMBER 2018 YTD
Bloomberg Barclays U.S. Aggregate Bond Index (Barclays Agg) 0.60% -1.79%
ICE BofAML U.S. High Yield Master II Index (HY Bonds) -0.91% -0.07%
S&P/LSTA Leveraged Loan Index (Senior Secured Loans) -0.90% 3.06%
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 decline amid volatility: U.S. equity and commodity price volatility negatively impacted the leveraged credit markets in November. Against the backdrop of heightened global growth and trade-related concerns, HY Bonds returned -0.91% even as corporate fundamentals remained stable.1,2 Senior Secured Loans returned -0.90% in November as volatility across the broader financial market spilled into the asset class, with bank loan mutual funds registering their second monthly outflow of the past 11 months.3,4 Year to date, Senior Secured Loans have outperformed both HY Bonds and higher-duration fixed income investments by a relatively wide margin. For example, the Barclays Agg returned 0.60% in November as Treasury rates declined but remains negative in 2018 due, in part, to the index’s higher sensitivity to interest rates, which are higher for the year.5

Recent sell-off in contrast to positive Q3 credit fundamentals: HY Bonds and Senior Secured Loans experienced their second straight monthly decline as both bond and loan prices declined to two-year lows.1,2 However, these declines are in contrast to relatively strong corporate earnings, stable credit metrics and low corporate default rates. Senior secured loan issuers experienced solid growth and improved fundamentals in the third quarter, with EBITDA (a proxy for earnings) growth rising to a seven-year high and overall leverage levels declining sequentially.2 Additionally, default rates remain near historic lows, with high yield bond and senior secured loan default rates ending November at 1.87% and 1.56%, respectively.6 We believe it bears monitoring whether positive credit fundamentals ultimately create a buying opportunity for credit amidst a broader sell-off in global equities.

KEY TAKEAWAY

Despite positive equity returns for the month, fixed income markets signaled a risk-off view as credit markets declined and the 10-year Treasury rate fell.


1 ICE BofAML U.S. High Yield Master II Index.
2 S&P Leveraged Commentary & Data.
3 S&P/LSTA Leveraged Loan Index.
4 Bloomberg Barclays U.S. Aggregate Bond Index.
5 J.P. Morgan Default Monitor, 12/3/2018.


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