May 3, 2018 - As volatility dissipated in April (the VIX fell six points) and equities and HY bonds traded modestly higher, the loan market churned out its fifth consecutive month of positive returns.  The S&P/LSTA Leveraged Loan Index (LLI) returned a three-month-best 0.41% in April, a level which only trailed high yield bonds’ 0.68% return.  At a 1.8% return on the year, loans not only continued to lead the other major asset classes (from treasuries to equities), they remained the only investment that actually delivered a positive return through April.  That said, market value (MV) returns in the loan market were negative for the third month running, albeit just barely at -0.02%. (In fact, MV returns have been positive just once since November).  That should not be surprising given that two-thirds of the market has been trading above par in the secondary this year.  According to the LSTA’s Trade Data Study, more than 60% of the $164 billion in first quarter secondary trade activity occurred at a price point north of par.  Furthermore, the median trade price increased to 100.25 last month, while the median Mark-to-Market bid-ask spread (on the traded universe of loans) tightened to a post-recession low of 48 basis points.

Despite the aforementioned MV losses reported on the LLI, market breadth levels actually illustrated noteworthy improvement over the past several months.  Back in February, just 21% of loan prices advanced in the secondary.  That figure would increase to 38% in March and then to 50% in April.  At the same time, the share of price decliners was falling.   Between February and April, the percentage of loan prices that suffered price declines fell from 63% to just 31%.  In turn, April’s advancer/decliner ratio came in at a three-month best 1.6:1 – despite a slight shift in technicals.  The shift wasn’t brought on by a lack of demand, though, as CLO issuance approached $11 billion while loan mutual fund flows totaled an estimated $2.2 billion.  But at $13.2 billion, visible demand fell short of the $14.5 billion increase in LLI outstandings. And that $14 billion went on to fuel a landmark event for the loan market:  LLI outstandings were quoted with a “t”, as in trillion, for the first time in its history.  By month-end April, the LLI accounted for $1.005 trillion in loans while the number of borrowers represented in the index increased to a record 1,011.

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