Loan Trading Volumes Dip 13% in 3Q18 as Volatility Remained Subdued

November 1, 2018 - After hitting $183 billion in second quarter – the busiest three-month period on record – U.S. secondary loan trading volume fell 13% during the third quarter to $162 billion, according to the LSTA’s 3Q18 Trade Data Study.  Year-over-year though, third quarter volumes increased 17% as S&P/LSTA Leveraged Loan Index (LLI) Outstandings expanded by 16%.  But to be fair, third quarter 2017 turned out to be a weak comp; it was the slowest quarter in two years.  To that point, trading volumes totaled $509 billion across the first three quarters of 2018, an increase of more than 5% over the same period a year prior, but perhaps a bit lower than some might expect given the $138 billion rise in outstandings this year.   Still, the market’s average monthly churn rate (trading divided by outstandings) remained constant at 6% across the two nine-month periods.  So from that point of view, liquidity remained stable during a period of strong growth in the market.

One of the possible reasons that trading volumes have not surged this year alongside outstandings has been a general lack of price volatility in the secondary market.  We see that trend in return volatility, where the LLI’s trailing 12-month standard deviation of return fell to a 10-month low of just 0.27% in September. (In contrast, High Yield and High Grade bond return volatility stands at 0.6% and 0.75%, respectively).  Furthermore, the monthly median trade price, which remained flat at 100 across the third quarter, has remained at or above par since September 2016.  At the same time, the average trade price, which increased 17 basis points to 98.2 in the third quarter, has hovered within a 60 basis point band north of 98 across all of 2018. 

It’s not surprising then that 84% of this year’s trades occurred at a price north of 98.  And while that figure has remained constant, its par-plus component fell to its lowest level on the year recently.   Back in the first quarter, par-plus trading activity hit a high-water mark of 61% of trades before dipping to 54% during the second.  But in the third quarter, par-plus trading tumbled to just a 39% market share as some of the “froth” was removed from the high-end of the market.  That trend makes sense given that spreads generally widened in the primary market during the third quarter.  As a result, secondary spreads increased as prices ground lower in the par-plus /lower yielding segment of the secondary.     

LSTA Full and Associate Members can access the full Summary, including charts, here (located under Secondary Trading & Settlement Monthly).  For more information, please contact Ted Basta.

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