High yield and loans both experienced positive returns in the second quarter of 2023. HYBL returned 1.78%, outperforming its primary benchmark, the Bloomberg US Aggregate Bond Index, in the first quarter by 262 bps.1
HYBL posted a positive return in the second quarter but underperformed its blended benchmark primarily due to credit selection within its loan allocation. Asset allocation net of cash drag was a positive contributor. During the quarter, HYBL modestly increased its collateralized loan obligations (CLO) debt allocation and repositioned its loan allocation by quality closer to benchmark from more underweight risk.
The top contributors to total return in the second quarter were Carnival Corp, Rakuten Group Inc, and Point Au Roche Park CLO, Ltd. The top detractors were Phoenix Services, Icahn Enterprises LP, and PRA Group Inc.
Retail high yield funds experienced $3.6 billion of inflows in the second quarter while outflows for retail loan funds experienced continued net outflows totaling $7.9 billion.2
|Top 10 Holdings||Coupon||Maturity Date||Weight (%)|
|POINT AU ROCHE PARK CLO, LTD.||11.3504||7/20/2024||1.03|
|ARES LXVIII CLO LTD||13.6339||4/25/2035||0.61|
|SUNOCO LP / SUNOCO FINANCE CORP||4.5||5/15/2029||0.6|
|BALLYROCK CLO 2020-2 LTD||11.4004||10/20/2031||0.57|
|HUGHES SATELLITE SYSTEMS CORP AKA EH HOLDINGS CORP||6.625||8/1/2026||0.52|
|CARLYLE US CLO 2021-9 LTD||11.8804||10/20/2034||0.51|
|ONEMAIN FINANCE CORP||3.5||1/15/2027||0.49|
|HOWMET AEROSPACE INC||3||1/15/2029||0.49|
|CDI ESCROW ISSUER INC||5.75||4/1/2030||0.49|
As of June 30, 2023, the top ten holdings accounted for 5.81% of the fund’s investments. The Fund Top Holdings are as of the date indicated, are subject to change and should not be relied upon as current thereafter.
|QTD||YTD||1 Year||3 Year||5 Year||10 Year||Since Inception Feb 16 2022|
|Bloomberg US Aggregate Bond Index||-0.84%||2.09%||-0.94%||-3.96||0.77%||1.52%||-5.49%|
|SPDR Blackstone High Income Composite Index||2.39%||5.96%||9.85%||4.80%||3.68%||4.22%||1.21%|
Source: State Street Global Advisors, as of June 30, 2023. Past performance is not a reliable indicator of future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. All results are historical and assume the reinvestment of dividends and capital gains. Visit www.ssga.com for most recent month-end performance. The gross expense ratio is the fund’s total annual operating expense ratio. It is gross of any fee waivers or expense reimbursements. Performance returns for periods of less than one year are not annualized. The market price used to calculate the Market Value return is the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the fund are listed for trading, as of the time that the fund’s NAV is calculates. If you trade your shares at another time, your returns may differ. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Gross Expense Ratio: 0.70% Net Expense Ratio: 0.70%
The gross expense ratio is the fund’s total annual operating expenses ratio. It is gross of any fee waivers or expense reimbursements. It can be found in the fund’s most recent prospectus.
Floating rate loans outperformed high yield bonds in the second quarter against the backdrop of a still-hawkish Federal Reserve Bank (Fed). Overall credit market performance over the first half has rebounded strongly from last year’s negative returns.
Rising rates pushed the US loan market to its strongest start since the Global Financial Crisis, gaining 3.2% over the second quarter and 6.48% over the first six months.3
CLO debt tranches also performed favorably posting a 2.43% return for the quarter. Lower-rated tranches outperformed in both Q2 and Q1, in stark contrast to 2022 where just AAA-rates CLOs finished the year in positive territory.4
High yield bonds lagged loans and CLOs, although the quarter’s 1.75% return contributed to a 5.38% return for the YTD.5
This performance came against ongoing macro and rate volatility and a market that appears to have acquiesced to the view that rates will need to stay at higher levels for longer.6 The market is now pricing in a terminal rate of 4%, significantly above the 2.65% anticipated in early May.7
After recovering from the March banking sector stress in April, credit markets weakened again in May weighed by the US debt ceiling wranglings.8 June’s return to form came as hopes for a soft landing amid ongoing strong economic data helped fuel a strong equity market rally.
Technicals have also supported performance, given ongoing supply shortage across loans, high yield and CLOs. The loan market issuance of $47.7 billion in Q2 compares to $52.4 billion in Q1.9 Overall issuance through the first half is 40% behind last year’s pace and at its lowest level since 2010.10 High yield issuers improved on the first quarter with the $53 billion of issuance pushing the YTD total close to 2023’s full-year total.11 Even so, high yield supply is depressed compared to historical standards, and ongoing rising star upgrades are further depleting the outstanding universe. Refinancings and extensions accounted for the bulk of the quarter’s loan and high yield supply.12
Demand for loans weakened as CLO supply fell by 43% compared to the first quarter,13 while $7.9 billion of outflows from loan mutual funds and ETFs made this the fifth straight quarter of withdrawals. By contrast, high yield funds experienced $3.6 billion of inflows during the quarter.14
Default activity has risen to a two-year high of 2.94% for loans and 2.71% for high yield. These are nearing their historical averages of 3.1% and 3.2% respectively.15
2023 Returns of Major US Fixed Income Indices
Prospects for higher-for-longer rates should underpin loan market performance over the near term, given their history of performing well through a rising rate environment. Despite pausing its 15-month hiking campaign in June,16 the Fed is expected to hike again at July’s meeting,17 although the need for additional hikes may depend on future economic data releases.
Floating rate CLOs should also continue to perform well as rates stay higher, while high yield and loans have both performed well following a Fed pause.18
Sentiment remains upbeat, perhaps as ongoing economic resilience fuels hopes for a soft landing.The technical support that has underpinned prices and spreads over the first half is likely to continue over the near term, and barring a macro or geopolitical shock, credit could grind higher over the slower summer months.
Conditions could deteriorate further out. The current fundamental health of the broader fixed income market may help keep defaults at more manageable levels, but they are expected to rise from current levels.19 Rising credit stress and the potential for slower growth could eventually push credits spreads above current levels. While mindful of these headwinds, a glance at corporate balance sheets highlights leverage at decade lows and interest coverage, while deteriorating, still close to a four-year high.20
Ongoing refinancing efforts have whittled down the 2023 loan maturities, but the wall steepens after that. Those unable to refinance in the capital market given the current aversion to lower rated credits may instead turn to other markets, including private credit, for refinancing options.
As defaults rise, loan and bond recovery rates have decreased in this cycle to 41.1% and 33.65% respectively, compared to their historical averages of 64.48% and 53.01%.21 We note, however, that recent bankruptcies have been focused in weaker sectors, which may be a driver for a lower recovery. We also believe that lender-on-lender violence actions, which might also reduce the overall recovery rate, will remain infrequent.
In an environment where multiples are unlikely to expand, we believe that driving value is increasingly going to come from assets where cash flow can grow. That means identifying sectors with secular tailwinds that drive growth beyond inflationary levels. We expect meaningful dispersion between issuers and sectors, and that larger companies in historically resilient sectors with lower leverage should outperform the market.
We believe this more challenging and volatile environment will lead to elevated performance dispersion across managers. Those with experience of previous downturns and an active investment strategy should, in our view, be better placed to identify the alpha opportunities amid the volatility.
HYBL Historical Asset Allocation
1 Morningstar as of June 30, 2023.
2 JP Morgan High-Yield and Leveraged Loan Morning Intelligence, June 30, 2023.
3 Morningstar LSTA Leveraged Loan Index as of June 30, 2023.
4 JP Morgan CLOIE, July 3, 2023.
5 Bloomberg US HY Index, June 30, 2023.
6 Bloomberg WIRP as of March 31, 2023.
7 Barclays US Credit Alpha, as of June 30 2023.
8 Pitchbook LCD, as of May 31, 2023.
9 Pitchbook LCD, as of March 31, 2023.
10 Pitchbook LCD, as of June 30, 2023.
11 Pitchbook LCD, as of June 30, 2023.
12 Pitchbook LCD, as of June 30, 2023.
13 Pitchbook LCD, as of June 30, 2023.
14 Pitchbook LCD, as of June 30, 2023.
15 JPM Default Monitor, as of July 5, 2023.
16 Reuters, Fed’s Powell Signals Fresh US Rate Hikes Ahead, as of June 29, 2023.
17 FOMC Chair Powell was also hawkish in his testimony to Congress on Wednesday and Thursday, saying “it will be appropriate to raise rates again this year, and perhaps twice,” if the economy evolves as expected. Barclays US Credit Alpha, as of June 23, 2023.
18 JP Morgan, Credit Markets Weekly, as of June 30, 2023.
19 JP Morgan, Default Monitor, as of July 5, 2023.
20 JP Morgan, 1Q23 High Yield Credit Fundamentals, as of June 12, 2023.
21 JP Morgan US High Yield and Leveraged Loan Strategy, as of July 7, 2023.
Basis Point (bps)
A unit of measure for interest rates, investment performance, pricing of investment services and other percentages in finance. One basis point is equal to one-hundredth of 1 percent, or 0.01%.
Bloomberg US Corporate High Yield Index
An unmanaged index that is comprised of issues that meet the following criteria: at least $150 million par value outstanding, maximum credit rating of Ba1 (including defaulted issues) and at least one year to maturity.
Bloomberg US Credit Index
An index that measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets.
Bloomberg US Dollar Floating Rate Note Index
An index that measures the performance of floating rate bonds issued by the US Treasury.
Bloomberg US Treasury Bellwether 3-Month Index
An unmanaged index representing the on-the-run (most recently auctioned) US Treasury bill with 3 months’ maturity.
Collateralized Loan Obligations, or CLOs
Securities that are backed by a pool of debt, typically business loans, that are grouped by credit quality into tranches.
Refers to a type of liability management transaction through which a company gives an advantage to a subset of creditors at the expense of another subset.
Important Risk Information
Investing involves risk including the risk of loss of principal.
This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.
The views expressed in this material are the views of Portfolio Management Team at Blackstone Capital, LLC through the period ended June 30, 2023 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.
Diversification does not ensure a profit or guarantee against loss.
Asset Allocation is a method of diversification which positions assets among major investment categories. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
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.
Investments in Senior Loans are subject to credit risk and general investment risk. Credit risk refers to the possibility that the borrower of a Senior Loan will be unable and/or unwilling to make timely interest payments and/or repay the principal on its obligation. Default in the payment of interest or principal on a Senior Loan will result in a reduction in the value of the Senior Loan and consequently a reduction in the value of the Portfolio’s investments and a potential decrease in the net asset value (“NAV”) of the Portfolio.
Prior to 02/26/2021, the SPDR Blackstone Senior Loan ETF was known as the SPDR Blackstone / GSO Senior Loan ETF.
The fund is actively managed. The sub-adviser’s judgments about the attractiveness, relative value, or potential appreciation of a particular sector, security, commodity or investment strategy may prove to be incorrect, and may cause the fund to incur losses. There can be no assurance that the sub-adviser’s investment techniques and decisions will produce the desired results.
Actively managed funds do not seek to replicate the performance of a specified index. The Fund is actively managed and may underperform its benchmarks. An investment in the Fund is not appropriate for all investors and is not intended to be a complete investment program. Investing in the Fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, 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.
Investing in high yield fixed income securities, otherwise known as "junk bonds", is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
There can be no assurance that a liquid market will be maintained for ETF shares.
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State Street Global Advisors Funds Distributors, LLC is the distributor for some registered products on behalf of the advisor. SSGA Funds Management has retained Blackstone Liquid Credit Strategies LLC as the sub-advisor. State Street Global Advisors Funds Distributors, LLC is not affiliated with Blackstone Liquid Credit Strategies LLC.