Largely stable
Corporate credit was relatively unchanged this week even as government bonds felt the effects of increased global political uncertainty. High yield bonds and senior secured loans were largely unchanged as investors remained focused on solid U.S. corporate earnings and stable economic data.1 High yield bond mutual funds reported a second straight weekly inflow, which brought the year-to-date net inflow to $732 million.2 Year to date, high yield bonds are providing returns of approximately 1.8%, with energy, chemicals and utilities among the best performing sectors.3,4,5,6 Year to date, CCC rated bonds have returned 3.3%, while B and BB rated bonds are generating returns of 1.7% and 1.5%, respectively.7,8,9 Meanwhile, senior secured loans continue to benefit from strong inflows, with bank loan mutual funds recording another weekly inflow for the week ended February 8, marking the thirteenth straight weekly inflow for a total of $13.4 billion over that span.2 Year to date, senior secured loans are providing returns of approximately 0.58%, with energy senior secured loans remaining a strong outperformer.10,11

Output cut
Oil prices were a focus this week, with crude prices declining early in the week on the back of a stronger U.S. dollar and rising U.S. production. The S&P 500 Energy Index declined approximately 1.2% as crude prices underwent some volatility following data that showed an increase in the number of U.S. oil drilling rigs and rising U.S. shale production.12,13 However, oil prices rallied later in the week, boosted by data showing gasoline inventories in the U.S. fell by 0.9 million barrels and a report suggesting that OPEC is largely complying with its pledge to curb output by almost 2%.14,15 According to the International Energy Agency’s latest oil market report, global oil supplies fell by 1.5 million barrels per day in January, indicating “record initial compliance of 90% with the output agreement.”15 Despite the uptick in oil price volatility and a modest decline in energy high yield bonds this week, energy senior secured loans continued to post gains. Year to date, energy senior secured loans are now providing returns of approximately 5.7% and high yield energy bonds have returned 2.5% over the same period.11,4

Political uncertainty
U.S. Treasury yields turned slightly lower this week as some increased political uncertainty in Europe combined with reduced inflation expectations led to the largest three-day price gain since June. U.S. Treasury yields followed European government bond yields lower earlier in the week after polls showed the potential that the French presidential candidate Marine Le Pen could win the election and make good on a promise to pull France out of the Eurozone.16 The geopolitical uncertainty added to the declines in U.S. government yields sustained in the wake of last week’s nonfarm payrolls report that showed only a modest rise in wages, causing investors to dial back expectations of inflation.17 The outlook dovetails with comments made this week by St. Louis Federal Reserve President Bullard in which he suggested that the federal funds rate could stay low through 2019. “The prerequisites for meaningfully higher inflation does not seem to have materialized so far,” he said.18 The yield on the 10-year U.S. Treasury note has been fluctuating between 2.3% and 2.6% in recent weeks, tempered by increased political uncertainty as some of President Trump’s more pro-growth measures were overshadowed by actions on immigration.19 Toward week’s end, however, focus returned to fiscal policy after Trump said at a meeting with airline executives that he would announce a new tax plan in the next couple of weeks.20

Chart of the week: Monthly inflows

6.64% 5.87% 6.90% 4.76% THE YIELD PREMIUM ON MIDDLE MARKET LOANS HAS INCREASED IN RECENT MONTHS Sources: S&P Capital Market Intelligence. Large corporate loans represented by the S&P/LSTA Leveraged Loan 100 Index. Middle market loans represented by the S&P/LSTA Leveraged Loan Index (middle market component, which is based on companies with annual EBITDA of $50 million or less). Average new issue yields (%) Middle market loans Large corporate loans January 2016 January 2017 September 2016 4.5 5.0 5.5 6.0 6.5 7.0 7.5

  • Bank loan mutual funds followed up their largest ever monthly inflow, approximately $7.6 in December 2016, with continued strong demand for the asset class. January marked the seventh straight month of inflows for bank loan mutual funds and saw the second-highest inflow into the asset class since September 2013.21
  • Generally speaking, bank loan mutual funds have experienced a broad resurgence in demand in recent months as investors have been drawn once again to their floating rate coupons as a potential hedge against rising interest rates.
  • At approximately $12.7 billion since January 2016, flows into bank loan mutual funds have far outpaced the $8.6 billion that has come into high yield bonds, another traditional income-producing asset class, during the same period.21 In part due to the healthy demand loans experienced during this time frame, they generated competitive returns against many of their peers.
  • A decline in yields across the broadly syndicated market can explain part of this divergence. However, a wave of repricing activity, which has intensified since late 2016, has helped exaggerate the spread between large corporate and middle market loans.
  • Senior secured loans, for example, have returned 10.5% since January 2016.22 This is below the approximately 19.6% total return high yield bonds produced in the same period. However, loan returns outpaced those on many other traditional income-producing asset classes, including real estate investment trusts, investment grade bonds and 10-year Treasuries.22

1 Bloomberg, 2 Thomson Reuters Lipper. 3 Bank of America Merrill Lynch High Yield Master II Index.
4 Bank of America Merrill Lynch High Yield Energy Index.
5 Bank of America Merrill Lynch High Yield Chemicals Index.
6 Bank of America Merrill Lynch High Yield Utilities Index.
7 Bank of America Merrill Lynch High Yield CCC and Lower Rated Index.
8 Bank of America Merrill Lynch High Yield B Rated Index.
9 Bank of America Merrill Lynch High Yield BB Rated Index.
10 Credit Suisse Leveraged Loan Index.
11 Credit Suisse Leveraged Loan Index (Energy Component).
12 Bloomberg.
13 Baker Hughes,
14 U.S. Energy Information Administration,
15 International Energy Agency,
16 Reuters,
17 U.S. Department of Labor,
18 Federal Reserve Bank of St. Louis,
19 Federal Reserve Bank of St. Louis,
20 CNBC,
21 Lipper, a Thomson Reuters Company.
22 Bloomberg as of February 9, 2017. High yield bonds are represented by the Bank of America Merrill Lynch U.S. High Yield Master II Index. Senior secured loans are represented by the Credit Suisse Leveraged Loan Index. Real estate investment trusts represented by the FTSE NAREIT All Equity REITS Index. Investment grade bonds represented by Bank of America Merrill Lynch U.S. Corporate Master Index. 10-year Treasury note represented by Bank of America Merrill Lynch Current 10-year U.S. Treasury Index.

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