December 5, 2024 - The secondary loan market rallied across November, driven by post-election optimism that boosted investor demand for broadly syndicated loans (BSL) and other risk assets. The average price for BSL in the secondary market advanced in 12 of 19 trading sessions in the month, ending 35 basis points higher at 97.25, the highest level since May 2022. The positive sentiment drove returns on BSL to 0.83% in November, according to the Morningstar LSTA Leveraged Loan Index (LLI). It was the second consecutive month in which trading in the secondary provided a tailwind to returns, with the market value component of return, which measures the change in loan prices, adding 0.14% to overall return. However, interest income declined to 0.69%, compared to a monthly average of 0.77% over the last twelve months, as the 75 basis points of cuts from the Federal Reserve – as well as spread reductions from heavy repricing activity in November – began to impact returns. Nevertheless, three-month SOFR at around 4.5% remains elevated by historical standards.

The strong appetite for risk assets also led to gains across other asset classes. U.S. high-yield bonds advanced 1.14% in November, according to the Bloomberg U.S. Corporate High Yield Index, while the S&P 500 jumped 5.9%. Year-to-date through November, the S&P 500 is up 28%, with returns on U.S. HY bonds outpacing BSL 8.7% to 8.34%, respectively. BSL returns for most of this year have been driven by coupon clipping at 8.63%, offsetting a 0.29% market value loss in the LLI.

The high investor demand for assets in November was met by limited new supply. On the demand side, inflows into retail mutual funds and ETFs jumped to $5.8 billion in November – the highest inflow since February 2022, according to LSEG Lipper. CLOs issued $26 billion of new paper, the second-highest monthly volume on record, pushing the asset class to a new annual issuance record with a month remaining in the year. Combined, visible demand from institutional and retail accounts added up to over $31 billion, the highest level this year. And while loan outstandings in the LLI inched higher for a second consecutive month (up$17.6 billion to $1.417 trillion), the increase reflected deals that priced in earlier months and joined the index in November. In the primary market, the green shoots to net new issuance that were visible across September and October disappeared in November. Of the $105 billion of loans pricing in the month, 71% came from repricings, the highest share in over 10 years, according to Pitchbook LCD.

The lack of supply also pushed the share of loans priced above par to 56% at month end, up from 33% in the previous month. Loan advancers outnumbered decliners by a ratio of 3.5:1, the highest since March, with two-thirds of loans registering price gains in the secondary of less than 1% in the month, according to LSTA/LSEG Mark to Market Pricing data. Looking at credit quality, higher-rated loans outperformed for only the second time this year. BB rated loans, which make up 22% of the LLI, edged out B rated loans (62% of the LLI) 0.95% to 0.92%, while CCC rated loans declined 0.47% in November – these make up an increasingly small share of the LLI (126 loans for $86 billion or 6% of the LLI). However, in the year to date, riskier B rated loans lead the way, returning 9%, compared to 7.6% for BB rated loans.