Charting the Market: Tight Credit Markets Complicate the Search for Income


Head of SPDR Americas Research

  • As a result of the low rate environment and rally in risk assets, yields for different rating bands and broad exposures are all in the bottom 5th percentile
  • The difference in yield among credit rating bands has also never been smaller than it is now
  • While credit markets are tight, the environment is still conducive, but upside is more constrained for traditional fixed rate high yield

Our current low rate environment has impacted all parts of the credit market complicating the search for income. Additionally, the yield difference among credit rating bands has never been tighter, indicating a lack of differentiation among segments.

Yet, because income generation is one of the three true outcomes of portfolio construction, alongside capital appreciation and risk management, it cannot be side-stepped because of scant opportunities.

In this charting market, I will discuss how investors on the hunt for income can navigate today’s anomalous fixed income market.

Extreme Low Yields for Credit

Credit has outperformed Treasuries year to date, as accommodative monetary policies, stimulative fiscal measures and resurgent growth have fueled a rally in risk assets. The strongest performance has come from the more speculative parts of the market, as shown below. There, duration headwinds have not been as big of a detractor as they have been in the investment- grade (IG) space. Duration has reduced broad IG returns by 5 percentage points versus 1.5 percentage points for broad high yield (HY).

Year-to-date Returns

Year-to-date Returns

Source: Bloomberg Finance, L.P. BofA Merrill Lynch, as of May 31, 2021. Broad high yield = ICE BoFA US High Yield Index, BB-Rated = ICE BoFA BB US High Yield Index, B-Rated = ICE BoFA B US High Yield Index, CCC & Lower = ICE BoFA CCC & Lower US High Yield Index = US IG Corporates and rating bands = ICE BoFA BB US Corporates Index. Treasuries = Bloomberg Barclays US Treasury Index. Past performance is not a guarantee of future results. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.

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1Based on the Yield-to-Worst of the S&P/LSTA Leveraged 100 Loan Index as of May 31, 2021
2Bloomberg Finance L.P. as of May 31, 2021
3Factset as of April 30, 2021. Based on annualized standard deviation over the trailing 60-month period. Senior Loans = S&P/LSTA Leveraged 100 Loan Index and High Yield = Bloomberg Barclays US Corporate High Yield Bond Index

Originally Posted on June 9, 2021 – Charting the Market: Tight Credit Markets Complicate the Search for Income


Yield: The income produced by an investment, typically calculated as the interest received annually divided by the investment’s price.

S&P/LSTA US Leveraged Loan 100 Index: The S&P/LSTA US Leveraged Loan 100 Index is designed to reflect the largest facilities in the leveraged loan market.

ICE BoFA US High Yield Index: A rules-based, market-value weighted index engineered to measure publicly issued non-investment grade USD fixed-rate, taxable, corporate bonds.

ICE BoFA US Corporate Index: A rules-based, market-value weighted index engineered to measure publicly issued investment grade USD fixed-rate, taxable, corporate bonds.

Credit Spread: A credit spread is the difference in yield between a US Treasury bond and a debt security with the same maturity but of lesser quality.

Bloomberg Barclays US Treasury Index: The Bloomberg US Treasury Bond Index is a rules-based, market-value weighted index engineered to measure the performance and characteristics of fixed rate coupon US Treasuries which have a maturity greater than 12 months. To be included in the index a security must have a minimum par amount of 1,000MM.


The views expressed in this material are the views of SPDR Americas Research Team and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.

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