Loans – The Calm During the Storm

October 18, 2018 - Last week marked one of the most severe equity market sell-offs in recent memory as the 10-year treasury yield spiked briefly above 3.25% for the first time since 2011.  During a span of three days, the Dow Jones, S&P 500 and NASDAQ all lost 5% of their value.  Furthermore, October 11th marked the third largest one-day plunge in the history of the Dow, while the NASDAQ recorded its biggest nosedive in seven years.  And despite better market sentiment on Friday, the S&P 500 went on to suffer its worst weekly loss since January 2016.  At the same time, the high-yield bond market extended its sell-off by trading lower by 64 basis points, which equates to roughly a 1% slide. Last week included, the rate-sensitive High-Yield bond market has traded lower by more than 3% on the year. To be fair, HY returns are still in the black, while treasuries and high grade bonds remain in the red. 

So, how did the loan market react to all the volatility?  Well, it didn’t react much because there weren’t any reasons to react. (Readers should be well aware that floating rate loans perform quite well during rising rate environments.)  Full disclosure - bid prices on the S&P/LSTA Leveraged Loan 100 Index (LLI100) did slide16 basis points last week or 0.2% - but are still up 54 basis points on the year.  And as one prominent loan trader joked, “loans traded lower for about three hours last week”.  Furthermore, the loan market’s largest ETF, BKLN which tracks the LLI100, reported a price decline of just 8 basis points last week, which it subsequently recovered by yesterday’s close.  And, jeremiads notwithstanding, investors still like loans.  To that point, loan funds that report weekly, including ETFs, reported inflows of $350 million, for the five business days ended Oct. 15.  And during the week prior, when 10-year treasury yields first spiked toward a seven-year high, investors added $479 million to loan funds while pulling nearly $5 billion from high-yield bonds.  So far this week, the broader markets have failed to provide any meaningful direction (interesting that strong earnings aren’t helping) as the Fed has reiterated its hawkish stance on the economy.  In looking forward, there are several scenarios that could threaten future returns across the capital structure – including loans. So what are these scenarios? Industry glitterati will discuss what lays ahead at the LSTA’s 23rd Annual Conference next Wednesday. We cordially invite you to join us (and them!).   

For more information please contact LSTA EVP Ted Basta at [javascript protected email address].

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