July 10, 2019 - The S&P/LSTA Leveraged Loan index (LLI) has returned 5.7% at the half-way point of 2019 – giving way to the best start of a year since the famed loan market rally of 2009. But 2019’s gains have not been just a straight shot higher nor have they outdone those produced by any of the other major asset classes – from equities through treasuries. The belly of this year’s loan return, 4.1%, took place during the first two months of the year when prices in the secondary recovered from December’s oversold levels. Then in late March, the rally came to a screeching halt as the Fed announced that rates would no longer be rising anytime soon. The result? The LLI fell back into negative territory on the month but still delivered a first quarter return of 4%.
The loan market quickly reversed course in April as loan market technicals shifted sharply towards excess demand for the first time in more than a year. Loans would go on to follow other risk assets higher that month and return 1.7% – the second highest return (only behind January 2019) in more than two years. Since then, returns have fluctuated from -0.22% in May to +0.24% in June. In total, loans returned 1.7% across the second quarter, which included an estimated 20 bps gain in market values (noting that market value returns have totaled -1% since the end of April). That said, the market’s advancer/decliner ratio still came in at a robust 2.4:1 across the second quarter, while falling far short of the 4.9:1 ratio reported across the first half of 2019.
In taking a closer look at June performance, secondary market indicators illustrated a negative bias. While advancers were slightly outpaced by decliners (40% to 43%), there were a notable higher percentage of big moves to the down side. Case in point, 13% of loans experienced a price decline of 1% or worse while just 7% of loans experienced a price gain of 1% or more. For that reason, average bid levels dropped 20 basis points in the secondary to a 96.8 handle – 25 basis points better than its second quarter low but 74 basis points off its high. On a positive note, mark-to-market bid-ask spread levels continued to remain at their 2019 tights – in a mid-90 basis point context. Finally, par-plus market share remained flat at 6% in June, after falling 12 percentage points from this year’s high-water mark of 18% registered back in April.