September 8, 2021 - by Kenny Riaz. The secondary loan market returned to the black as heightened investor demand pushed CLO formation to record levels in August. The S&P LSTA Leveraged Loan Index (LLI) returned 0.47% in August, after July registered the first negative return reading of 2021, albeit a mere -0.01%. YTD returns now stand at 3.76%, compared to the same period last year when YTD returns were in the red at -1.29%. On the cross-asset front, high yield bonds lead fixed income returns at 4.64% on the year. Conversely, high grade bonds and 10-year treasuries remain in the red on the year at -0.06% and -2.48% respectively, despite heightened threat of the Federal Reserve tapering its bond purchasing program.

As yields continue to decline and spreads further compress, investors continue to embrace a risk-on mentality, driving demand for riskier paper. The demand dynamics around lower rated paper mean that the CCC bucket of loans is a driving component of LLI returns. CCC loans registered their first negative return for 2021 in July returning -0.26%, driving overall returns for the LLI into the red for July. As CCC loan returns rebounded to 0.95% in August, overall LLI returns turned positive. Meanwhile, yields within the secondary loan market continue to sit near record lows, with August’s yield-to-maturity coming in at 4.27%, down significantly from 4.7% from the beginning of 2021. Likewise, looking at spread to maturity, the same trend of spread compression is seen in riskier paper, spreads within this space have tightened since the end of 2020, with B- loans tightening 31bps to L+468, and CCC loans tightening 218bps to L+924 in the end of August.

Shifting our focus to inflows of capital to the loan market, August marked the 9th consecutive month of positive fund flows for loan mutual funds, with August inflows totaling $2.2B, and an impressive YTD total of $23.1B. Even more impressive, a record $19.2B worth of CLOs were printed in August, with a total of $111.6B being printed to date in 2021. As a result of heightened demand, the secondary remained strong, with the average bid rising 21 bps to 98.25. August’s advancer/decliner ratio directly reflected this, with decliners falling to 32% and advancers rising to 56%. A further breakdown of August’s market reveals that close to 60% of loans reported price gains of 1% or less, while 33% of loans reported MTM losses of 1% or less. Secondary price distributions held steady across the month as the percentage of loans priced above par increased one percentage point to a 12% market share, while loans priced in a sub-70 price range remained rangebound at just a 1% share.

For more information on the secondary market, please contact Kenny Riaz.

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