February 7, 2023 - While equity investors have so far “sold the rally” in February, loan prices in the secondary market continued to churn higher – up 29 bps through the first week of trading.  February price action followed a stellar January, where the Morningstar/LSTA Leveraged Loan Index (LLI) returned 2.7%, the highest monthly reading since the market rally of second quarter 2020.  While today’s total loan return includes an enticing monthly interest coupon of 81 bps, the market value component of return totaled 193 bps in January, after averaging 90 basis points across the fourth quarter.  Most importantly, market breadth ran decisively bullish in January. The market’s advancer/decliner ratio improved to almost 10:1 (from 1:1 in December), with 87% of loan prices advancing and just 9% declining.  Even better, January’s ratio improved equally on both sides of the equation with advancers increasing 39 percentage points and decliners falling 38 percentage points.  In turn, the market’s average bid level increased a notable 180 basis points, to 94.2 – the first month-end reading above 94 since August.  January’s final reading was 248 basis points above the LTM low of 91.75 in July, but 453 bps below the LTM high of 98.76 during last February.  The same trend was found in the market’s average bid-ask spread which tightened 18 basis points in January to 119 bps.  That said, spreads remain 49 bps higher than their LTM tights but 21 basis points lower than their LTM wides.  Clearly, a lot of wood still needs to be chopped in 2023 if the secondary is to return to its natural near-par levels, but let’s not discount the strongest start to a year since 2009.  According to Pitchbook, LCD, the new year rally has been so consistent that the LLI has yet to register a negative daily return in 2023, extending the positive daily streak to 46 days through February 6th.  In fact, January 2023 was the first calendar month of uninterrupted daily gains since December 2019.  Furthermore, and maybe the most telling, the percentage of loans priced at or near 100 increased to a 4.6% market share in January, which marked the first time the ratio sat above 1% since April – a span of nine months.

Away from a stronger bid secondary, technical conditions were a mixed bag at best in January.  While institutional lending activity improved, LLI outstandings contracted by roughly $7B, after factoring in paydowns of course.  On the demand side, CLO issuance totaled north of $6B, which isn’t necessary a bad print to begin a year.  But January issuance came in $1B shy of fourth quarter’s rather lethargic monthly average of just $7.3B – a stat which highlights the difficult market conditions that still lie ahead for CLO managers.  And in sticking with the “mixed bag at best” approach, loan mutual funds and ETFs continued to experience outflows in January, for the ninth month running.  But outflows totaled just $1.4B – marking the first sub-$2B monthly outflow over the period, while totaling just a fraction of the $4.75B average outflow amount reported since May. 

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