September 10, 2020 - After a 7.2% performance in August, the equity markets took a dive earlier this week; the secondary loan market, meanwhile, remained well bid through the second week of September. Looking back, loan prices continued to recover in August alongside other risk assets despite the uncertainty that the markets have seemingly been ignoring. (Caveat: The equity markets certainly got the note earlier this week.) Through August, though, risk assets have rallied for the last five months after falling precipitously in March.
In loan land, returns have softened since the height of the rally in April, when the S&P/LSTA Leveraged Loan Index (LLI) returned 4.5%. Even still, loans returned 12.5% since the end of March after tallying a 1.5% August return. YTD (through month-end August), loans remain in the red at -1.3%. Loan returns trail equities (+9.7%), and high-yield bonds – which are back in the black at 0.75% after an impressive run higher over the past two months. The high-yield market has simply been on fire, with outstandings growing by roughly 15%, to $1.44T, since late March. Conversely, institutional loans outstanding remain basically flat over the same period, at $1.19T. Retail investors have played their role here, as high yield bond funds have raked in $42B across 2020, as opposed to the $25B of mutual fund outflows reported in the loan market. And CLOs haven’t been much help in terms of new demand over the first eight months of the year, with issuance coming in at just $46B as compared to the $82B created over the same period last year. That said, we hear the CLO engine is revving up in September, with a number of deals already in the hopper.
Back to the August secondary loan market. After improving 850-plus basis points between April and July, the loan market’s average bid level tacked on another 125 basis points in August. Today’s average bid level sits at a 93-handle – off roughly 430 basis points from its pre-COVID-19 high. Strong market breadth drove performance yet again in August as the market’s advancer/decliner ratio stood at 5:1, with 76% of loan prices advancing and just 15% declining. August marked the second month in a row where the advancer percentage remained above 75%. While impressive, it will be interesting to see if that trend will continue across September as volatility continues to spike in the equity markets.