MTM Monthly September: Third Quarter Loan Performance Hits 2-Year Best

October 4, 2018 - Well that turned out to be a strong ending to the third quarter.  Loans outperformed all major asset classes– from equities to treasuries - in September.  After pulling back slightly from overbought territory in August, loan prices once again rallied in the secondary market.  In turn, the S&P/LSTA Leveraged Loan Index (LLI) returned 0.69% in September, lifting third quarter and full year returns to 1.84% and 4.03%, respectively.  Third quarter returns came in at a two-year high on the back of a bullish advancer/decliner ratio of 3:1. Furthermore, market value returns were positive during two (July and September) of the last three months as compared to just once prior to July (all the way back in January!). 

Returning to September performance, prices in the secondary increased by an average of 25 basis points.  In turn, the market’s advancer/decliner ratio was reported at 3.25:1 after coming in even during August.  All told, 65% of loan prices advanced in September while 20% declined.   Unsurprisingly, par-plus market share popped to 56%, an increase of 11 percentage points over August and double the figure reported back in July.

In looking back across the past several months, the performance of the loan market has been closely tied to technical conditions. While that held true again in September, the trend finally reversed.  Despite a handful of huge deals closing in September, the market experienced the largest monthly supply shortfall of the year.  In total, LLI outstandings grew by just a bit more than $1 billion in September after averaging increases of more than $20 billion per month since May.   On the opposite side of the ledger, new visible demand tailed off in unison as CLO issuance totaled $8.5 billion in September (roughly $3 billion shy of this year’s monthly average). And when the near $1 billion of September loan mutual fund flows are added to the total, total visible demand outpaced net new supply by nearly $9 billion. This is a far cry from the average monthly supply surplus of $7.4 billion that was registered between May and August. 

As we enter the fourth quarter, loan returns continue to lead the other major fixed income markets on the year and across the previous 12-month period.  Today, the market’s average bid level in the secondary market sits at 98.57, roughly 50 basis points ahead of where we began the year.  And if the secondary trades flat across the remainder of the year, loans will add another 1.4% in interest income to their total return. This would lift the full year return figure to approximately 5.5% - slightly ahead of most managers’ earlier expectations.  

LSTA Full and Associate Members can access the full Summary, including charts, here.  For more information, please contact Ted Basta.

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