February 2, 2022 - Equities and bonds, of course, sold off across most of January. In contrast, loans benefited from their floating rate disposition as investors looked to hedge against rising rates. To that point, investors poured a record $9.7B into loan mutual funds and ETFs to begin 2022, or roughly 30% of last year’s total. As readers are aware though, all floating rates are not equal. On the CLO side, issuance was muted in January at just $4.9B, as managers sorted out how to price new deals on term SOFR in place of the LIBOR benchmark. But let’s not forget the record $56B of CLOs that were priced during last year’s fourth quarter, when managers looked to get ahead of the year-end deadline for LIBOR-based CLO issuance.
Getting back to January performance, the S&P/LSTA Leveraged Loan Index returned 0.36%, which on its own doesn’t seem that impressive until you consider that equities (-5.2%) and high-yield bonds (-2.75%) posted their worst monthly losses since March 2020. Moreover, the loan market has not only outperformed equities and high yield over the past three months (not to mention the uber-rate sensitive high-grade and treasury markets), it is the only asset class of the five that has produced a positive three-month return at 0.84%.
All did not end well in the secondary loan market in January though: After rising a combined 44 basis points during the first 13 consecutive sessions, bid levels declined by a total 39 basis points across the last seven trading sessions of the month. In total, the secondary ended January at an average bid level of 98.69, just 5 basis points ahead of its year-end figure. At the same time, bid-ask spreads moved marginally wider, by four basis points, to end January at an average spread of 71 basis points. While January market breadth remained slightly bullish on an advancer/decliner ratio of 1.6:1, 36% of loan prices still ended the month lower. That all said, the most telling example of the late-month shift in sentiment in the secondary market was the volatility found in par-plus market share, or the percentage of loans bid above 100. Case in point, just 12% of loans were bid above par at the beginning of the year. That figure quickly ballooned to 24% by the third week of January, only to fall back to 13% by month-end. But it’s not like traders became all too risk averse – after all, CCC’s still led the market higher in January, while single B’s once again outperformed double B’s. And perhaps risk aversion is not called for. After all, the default rate, by amount, remained below 0.3% and upgrades outpaced downgrades for a tenth consecutive month, according to LCD.
For more information on the secondary, please contact Ted Basta.