March 22, 2018 - U.S. secondary loan trading volume decreased 7% in February to $52.2 billion.  (Noting that January came in at a seven-month high of $56.3 billion).  The market has now traded north of $50 billion permonth during four of the previous five months (a seasonally low December broke the trend).  And over that period, an average of 465 loans traded each day with volumes totaling in excess of $2.7 billion per day.   During February, market breadth (the number of unique loans traded) remained robust at 1,465 loans traded – the fourth consecutive month north of 1,450 loans.  This trend makes sense given today’s larger secondary market.  Case in point- the S&P/LSTA Leveraged Loan Index has added 60 new loans since month-end October 2017 while outstandings have swelled by $41 billion; to a record high $980 billion.

While volatility levels ran higher across other asset classes in February, loans continued to stay the course.  As an example, the average 12- month lagging standard deviation of return (SDR) for Equities spiked above 2% for the first time in a year.  In comparison, loans reported a Flat SDR of just 0.3% (the second lowest level reported since summer 2014).  Interestingly, while the average bid level on the S&P/LSTA Leveraged Loan Index (LLI) declined 15 basis points in February (63% of LLI loans recorded MTM price declines), trade data revealed a different outcome.  February’s average trade price increased 40 basis points to 98.63 while the median trade price improved by an eighth to 100.38 – a three year high.  So why the discrepancy?  A change in behavior on trading desks.  Back in January, trade activity within the sub-98 price range swelled to a multi-month high 18% market share as traders looked to higher yielding loans.  But in February, traders became more risk-adverse and concentrated on the high-end of the market.  As a result, sub-98 activity fell to just 12%.  In turn, trading volume on loans trading north of 98 swelled to an 88% market share in February, and thus artificially increased both the average and median trade prices.

That all said, the most intriguing February story line was produced on the Par settlement front.  As reported last month, historical trends illustrate that January settlement times always spike and then normalize during February.  And that trend was evident once again in 2018, but the level of improvement during February was surprising to say the least.  Back in January, the mean and median par settlement times increased one day to T+20.9 and T+14, respectively.   Then during February, the mean tightened 3.8 days to T+17.1 (a 12-month low) while the median fell four days to T+10 (the previous multi-year low was T+11).  So what drove the improvement?  More than 50% of trades settled within T+10 (33% settled within T+7) while just 23% reported settlements wider than T+20.

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