Download the complete outlook


High yield bonds started the year strong, posting solid returns despite a tough May. Senior secured loan returns have been lower, but the asset class has performed well nonetheless and held up better during May’s sell-off. The first quarter, plus April, was relatively smooth sailing. Especially in comparison to 2018’s tumultuous fourth quarter, risk assets broadly recouped their losses, and then some. Macro headwinds coupled with policy uncertainty injected some volatility in May; however, we expect leveraged credit will follow equity’s lead rather than drive volatility itself.

Even though we believe we are in the later stages of the current cycle, we still view the environment for credit as relatively favorable. However, the market seems poised to react if certain macro headwinds become more pronounced – a meaningful slowdown in growth, trade war escalations and Fed actions, or lack thereof, can all inject further volatility. We believe that value still exists in leveraged credit, but it may be harder to discern as we get later in the cycle. Fundamental analysis, while key at any stage of a cycle, will become increasingly important in a market where yield, or carry, is the primary driver of returns.

Both the high yield bond market and senior secured loan market have similar average yields to maturity, at 6.44% and 6.70%,1 respectively. Assuming stable price returns over the balance of the year, this would imply roughly 3% in additional return for both markets by year-end. While it may not be a straight line to get there, we believe this type of return outlook is reasonable.




1 Bloomberg.


All data as of June 30, 2019, unless otherwise noted.

Read the analysis for each indicator:


This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.