April 23, 2020 - March Trading Volumes Obliterate Previous Highs
Prior to March 2020, LSTA monthly secondary loan trading volume peaked back in January 2018 at $76B. From that point forward, monthly volumes averaged $61.3B. In March though, trade activity spiked to a fresh record $119B – 57% higher than January, 2018 and an astounding 95% higher than the 13-month average that followed. Incredibly, the annualized March turnover ratio increased above 120% as compared to the low 70% annual turnover ratio reported over the past five years. From a price distribution standpoint, 44% of volume was comprised of loans that traded in a sub-90 price context and 13% of trades were below 80. With low prices and significant uncertainty, 44% of loans reported a MTM bid-ask spread of at least 250 basis points on trade date. Daily trading volume averaged $5.4B per day in March and peaked at $7.4B when prices bottomed out on the 23rd. On average, slightly more than 550 loans traded daily, a 10% increase over the LTM average. Across the entire month, a total of 1,450 individual loans traded, a level slightly below that of its LTM average. But making up for that slight shortfall in market breadth, was a substantial increase in market depth, or trade frequency. Across March, a record 62% of loans traded actively, or more than 20 times per month.
Trading Through the March COVID-19 Induced Price Volatility
The COVID-19 induced price volatility and subsequent trade activity observed in the secondary loan market across March was unprecedented. According to the 1Q2020 Secondary Trade Data Study, loans were trading in a mid-97 context at the beginning of the March, after suffering a 150 basis point decline during the last week of February. Price action from that point forward was intense, to put it mildly. During the first two weeks of March, the average trade price fell almost six points to a high-91 handle. Over the same period, LSTA/Refinitiv Mark-to-Market (MTM) bid-ask spreads, on the traded loan universe of loans, widened 134 basis points to 233 basis points. By mid-March, price declines began to intensify as mutual funds were selling to meet redemptions and CLOs were managing their tests by trading around record rating downgrades. And sure enough, over the next six trading sessions the secondary loan market would trade down to levels not seen since the height of the great financial crisis. From March 16th through the 23rd, trade prices fell an additional 14 points, to a sub 78-context, as MTM bid-ask spreads widened another 144 basis points to an average of 375. In total, prices declined almost 20 points as bid-ask spreads widened 280 basis points across the first 16 trading days of March. Never had prices fallen so hard and so fast. But from that point forward, the market seemingly found its bottom, partly thanks to the Fed, as loans finally caught a bid. Through month-end March, a span of six sessions, prices rebounded 11 points as the average trade price rallied back into a 89-context. From a historical standpoint, the only other period the secondary traded in a sub-90 range was from August 2008 through March 2010. Happily, that “record span” seems fully intact, as March’s late month rally extended into May as traders report that prices have continued to grind directionally higher.
For additional coverage on March activity and that of the entire first quarter, Full and Associate LSTA Members can access our 1Q2020 Secondary Trade Data Study or reach out directly to Ted Basta for more information.