January 21, 2021 - LSTA secondary loan trading volume increased 4% to a record $772B in 2020. The COVID-19 induced price volatility of March went on to set the groundwork for a record year in trade activity and the storied V-shaped recovery in secondary prices that followed. According to the LSTA’s 2020 Secondary Trade Data Study, loans were trading in a mid-97 context at the beginning of March 2020 while January 2019’s $76B stood as the high water mark for monthly secondary trade activity. By March 23rd, the secondary traded down to levels not seen since the financial crisis – the daily average trade price had plummeted roughly 20 points to a 78-context. But the market quickly found its bottom, partly thanks to the Fed, as loans caught an immediate bid following the liquidity-fueled selloff. From March 24th through month-end, a span of just six trading sessions, prices rebounded 11 points as the average trade price rallied back into an 89-context. Loan prices had never fallen so fast, nor had they ever rebounded in such fashion over such a short period of time. In turn, secondary trading volumes totaled a staggering $119.3B across March, 57% higher than January 2019’s previous high and twice 2020’s monthly average (excluding March’s activity) which came in just shy of $60B. With March’s record trading volume, the market’s 2020 annual turnover ratio improved by two percentage points– to 67%, or its third sub-70% reading across the past five years.
Secondary price levels continued their march back to fair value across the entirety of 2Q20. Turns out, the market was not deterred by rising defaults and declining credit quality. Hence, price volatility and trading activity started simultaneously normalizing. After falling 19% in 2Q20, trading volume plunged 23% to just $156.2B in 3Q20 – the market’s first sub-$160B quarter since 4Q17. The price rally though, remained well intact as strong market breadth continued to drive trading levels higher across 3Q20.
To begin the fourth quarter, monthly trading volumes increased for the second month running, this time by 6% in October, to a four-month high $60.4B. October marked the first-time volumes increased in back-to-back months since March – a trend that was closely tied to improving technicals. But as new issue volumes swelled in October, prices in the secondary softened, thus ending the market’s rebound at six months. While trade activity fell 15% in November and another 3% in December (to a four-month low $51.2B), loan prices staged yet another massive rally on the hopes of a successful rollout of the COVID-19 vaccine, Ultimately, 87% of the secondary traded higher. All told, the average trade price increased 212 bps over the last two months of the year, ending December at 97.5 – and just 15 basis points off its Pre-COVID-19 high. The median trade price, which seems to be a better indicator of where the secondary is currently trading, improved 200 bps to a 99-handle across November and December. The median level ended the year 800 basis points richer than its March low but 100 bps lower than its January high. At the same time, MTM bid-ask spreads on the traded universe of loans tightened 15 bps across the last two months of 2020, bringing the average to 90 and the median to 75 bps. Both figures are now in earshot of their February tights, which were reported at 78 bps and 63 bps, respectively.