February 17, 2022 - January witnessed a flurry of secondary trading activity in the loan market as volumes spiked 48% to $76B. While this marked the third busiest month on record, January 2022 still fell well short of March 2020’s all-time high of $119.3B. January volumes surged on a substantial increase in monthly market breadth where a record 1,670 individual loans transacted in the secondary. In comparison, an average of 1,536 loans traded monthly across 2021, with that figure expanding to almost 1,600 loans during 4Q21. To put those statistics in perspective, the S&P/LSTA Leveraged Loan Index currently tracks 1,472 individual loan facilities.
So why did volumes spike to a 22-month high? First, visible demand levels remained elevated in January, despite the secondary sell-off in the latter half of the month. While CLO issuance was muted in January at just $4.9B, LCD saw 131 warehouses open across U.S. trustees. In addition, investors poured a record $9.7B into loan mutual funds and ETFs to begin 2022, or roughly 30% of last year’s total. Second, increased volatility generally drives trade activity higher. This trend was evident during the second half of January when average daily trading volumes surged 27% to $4.3B. Indeed, after rallying 89 basis points during the first 10 trading sessions of January, average daily trading levels slumped 43 basis points across the last ten sessions. The soft landing notwithstanding, January’s average trade price still tacked on a 24 basis points gain, ending the month at 99.22. Impressive to say the least, given the last time the market was trading north of a 99-handle was way back during the summer of 2014. Moreover, after rising 13 basis points, January’s median trade price sat just 12 basis points shy of par, at 99.88. These month-over-month price gains were supported by a slightly bullish advancer/decliner ratio of 1.6:1; 36% of loan prices did in fact end the month lower. At the same time, LSTA/Refinitiv mark-to-market bid-ask spreads on the traded universe of loans moved marginally tighter, by four basis points, ending January at an average spread of 51 basis points.
Moving on to the current market, negative sentiment (Russia, Russia, Russia!) continued to pressure secondary loan prices lower during the first two weeks of February, according to the LLI. As of press time, the LLI’s market value return of negative 0.37% has sunk the month-to-date total return to negative 0.2%. This in turn means that the year-to-date total return is now barely positive at just 0.17%. But we won’t complain, considering the outsized losses registered by equities and the other fixed income markets this year.