May 8, 2019 - While markets can turn on a dime, they can also turn on a tweet. President Trump tweeted on Sunday that starting this Friday the US would increase current, and apply new tariffs on Chinese goods if a trade deal could not be reached. Robert Lighthizer, the top U.S. trade official, reiterated that stance on Monday and by Tuesday it became clear that Trump’s weekend threat was not just a negotiation tactic. While equities pared their steep losses on Monday, the major US stock indices plummeted more than 2% on Tuesday (and are off almost 3% for the week). So what does this all mean for the loan market? Not much, at least in the short-term. The S&P/LSTA Leveraged Loan Index (LLI) reported a loss of just 0.06% on Monday and another 0.01% loss on Tuesday. This week’s price action in the secondary loan market comes on the heels of an impressive April rally where LLI returns totaled 1.65%. Year-to-date, loan returns stand at a nine-year best 5.75%, despite a negative showing back in March and a weak beginning to May. 2019 loan returns are running in the middle of the pack of other asset classes– they trail equities and high-yield bonds but are ahead of high-grade bonds and 10-year treasuries.
Highlighting the breadth of the April rally, the loan market’s advancer/decliner ratio came in at a bullish 7:6 1. An impressive 80% of loans reported Mark-to-Market (MTM) price gains while just 9% reported losses; a far cry from March when advancers and decliners totaled 23% and 62% shares, respectively. MTM bid levels went on to improve 111 basis points in April, to an average bid of 97.52 – the highest level reported since mid-November. And as prices ran higher, par-plus market share surged 16 percentage points to a six month high 18% share. At the same time, MTM bid-ask spreads tightened 10 basis points to a five-month low of 97 basis points. Of note, monthly technicals shifted toward excess demand for the second consecutive month, but did so in a big way in April. First, let’s start with the supply side. For the first time in 15 months, S&P/LSTA LLI outstandings decreased by $1.3 billion after increasing just $3.7 billion in March. Prior to the start of the second quarter, LLI outstandings were growing at an average rate of $15 billion per month since the beginning of 2018. And while new deal flow has been severally limited as of late, the high-yield bond market has increasingly been used by borrowers to take out existing loans as well. On the visible demand side, April CLO issuance totaled a four-year high $15.6 billion, which increased year-to-date issuance to $43.8 billion – slightly ahead of last year’s pace. That said, investors continued to pull money from loan mutual funds– a trend that has lasted for the better part of the past seven months. April outflows came in at an estimated $3 billion which marked an “improvement” over March’s $3.75 billion. Even so, outflows have totaled over $14 billion so far in 2019 and a staggering $36 billion over the past six months.