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Beyond observing overall returns for high yield bonds and senior secured loans, it’s important to understand where returns are coming from. In particular, are higher- or lower-rated issuers materially outperforming the average return? As the charts indicate, both markets have favored higher-quality issuers over lower-quality ones. Despite the strong rebound in 2019 – a situation where lower-rated credits typically outperform – BB rated issuers led the way, followed by B and CCC rated issuers. This is one statistic that was meaningfully impacted by the returns in May, as CCC rated issuers had been outperforming in both high yield bonds and loans before risk assets sold off as equities declined.

In both markets, CCC rated issuers meaningfully underperformed during last year’s fourth quarter sell-off. The recovery has been uneven, which could be an indication that investors are cautious about lower-rated issuances following recent bouts of volatility, opting for higher-rated instruments instead.

Given the strong returns year to date, we would expect B and CCC to outperform BB rated issuers, but this hasn’t been the case. If markets become more comfortable with the outlook, outperformance by lower-rated issuers in the second half of the year could be a source of upside to an otherwise yield-driven return profile for credit.

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

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