March 6, 2025 - Geopolitical tensions, a looming trade war, and frothy market levels combined to put investors on edge in February. The S&P 500 dropped 1.3% while U.S. high-yield bond returns fell to 0.67%, from 1.37% the previous month, according to the Bloomberg U.S. Corporate High Yield Index. In the broadly syndicated loan (BSL) market, total return shrank to 0.11%, the lowest level since October 2023, as reported by the Morningstar LSTA Leveraged Loan Index (LLI). Performance in the BSL market reflected a softer secondary market with the market value component of return registering a loss of 0.50%. However, interest income of 0.60% helped keep total return in the black. Even so, the tailwind from interest returns (interest rate plus contractual spread) has declined over the last six months due to interest rate cuts by the Fed and tighter spreads from a record level of repricing activity. Looking at the first two months of the year, total return stands at 0.80%, driven entirely by coupon clipping, which lags the 1.6% return from a year earlier.
After a fast start to the year which saw loan prices reach the highest levels in nearly three years, secondary prices tailed off in February. The LLI’s average bid level declined 46 basis points, ending the month at 97.15. Bids fell across 17 of 20 February trading sessions, with 73% of loan prices declining and just 15% advancing – the most lopsided ratio since September 2022. The closely watched share of the secondary market priced above par declined to 34% in February after reaching 56% in January. The par-plus share has been a key indicator of strong demand and a driver of record repricing activity over the last year.
In February, repricing activity slumped to a six-month low of $40 billion, from $137 billion in January, per LevFin Insights. Meanwhile, net new money issuance edged up to $30 billion in the month, representing about a third of total priced volume, as market volatility sidelined optimism around a significant resurgence in M&A activity in 2025.
Despite skittish market sentiment, demand for floating-rate paper remains strong, supported by the higher for longer interest rate environment. For instance, while new-issue spreads for B rated loans widened 16 basis points (to 336 basis points) from January’s tights in February, spreads remain near their multi-year lows, according to LevFinInsights. In turn, the weighted average nominal spread on the LLI has tightened 8 basis points so far this year, to 332 basis points, reflecting January’s high level of repricing volume.
Demand from CLOs, the largest buyers of BSL, remained strong, with 39 deals priced in February amounting to $18.7 billion. CLO new-issue spreads continue to tighten to post-crisis lows. Average AAA spreads for BSL CLOs tightened 12 basis points so far in 2025 to 118 basis points, with an Oak Hill Advisors’ CLO pricing its AAA notes at SOFR plus 110 basis points on February 28 – the lowest AAA print in the SOFR era. The cheaper cost of funding for CLOs has spurred record reset and refinancing activity over the last year, a trend which continued into 2025. According to Citi Research, $27.4 billion of new issue volume has been dwarfed by a combined $67 billion of reset and refinancing volume. Beyond CLOs, retail demand for loans remained robust, with loan mutual funds and ETFs reporting $2.7 billion in inflows during February. Combined with the $5 billion inflow from the previous month, loan funds have experienced their highest two-month period since April 2022, according to LSEG Lipper.
Strong demand has been underpinned by stable fundamentals. The default rate on the LLI ticked lower to 4.18% (by count, including LMTs) in February and is expected to decline throughout the year as activity rolls off the last twelve-month window. But looking ahead, investors are becoming less bullish about the broader economic outlook, with traders pricing in an additional third interest rate cut by the Fed this year, despite an increase in the latest inflation reading.
