September 23, 2020 - LSTA secondary loan trading volume fell to a 33-month low in August while prices continued to edge higher during month five of the rally. August trading volume totaled just $48B – the market’s first sub-$50B reading since December 2017. August activity was off 8% from July’s $52B which, itself, was 25% lower than June. In comparison, volumes were 11% higher during July and August 2019, so it hasn’t been just a normal “summer slowdown” in the loan market. First off, crossover traders have increasingly been concentrating their efforts on a red hot high yield bond market where outstandings have spiked 15%, to $1.4T, over the past six months. And while S&P/LSTA Leveraged Loan index outstandings did in fact tack on almost $15B across July and August, the size of the index ($1.2T) has barely budged since March. Second, visible demand levels have remained weak in loan land, a trend that dampens secondary flows. To that point, CLO issuance, which is down 44% this year, tapered off across July and August, with new issue volume totaling just $11.3B (the lowest 2-month combined print in years outside of March and April’s $7B). Loan mutual fund outflows have subsided over the past several months – totaling just $2.2 billion since the end of June – the lowest two-month tally this year. Diminished selling pressure has been helpful for loan performance, but clearly not for trading activity. And we should put the summer redemption numbers in broader context: Loan mutual fund outflows still have totaled $25B in 2020 while HY bond funds have raked in $42B.
While trading volumes tapered off this summer, the rally remained well intact as price levels surged to six-month highs. Strong market breadth drove performance yet again as the secondary’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%. That said, the total number of loans that traded in August fell below 1,400 loans – a 5% drop off from the LTM monthly average. Meanwhile, the price trend was our friend: The median trade price increased another 113 bps in August, to 97.75. Since the market’s March low, the median price rallied 700 bps but still sits 200 bps lower than its pre-COVID-19 high. At the same time, the average trade price improved 145 bps to just shy of a 95-handle. This average is up 621 bps since the beginning of the rally, but remains 272 bps off its February high. And as prices continued to improve across almost 80% of the secondary in August, LSTA/Refinitiv Mark-to-Market bid-ask spreads on traded loans continued to tighten. The median bid-ask spread narrowed another 10 bps, to 95 bps by the end of August, while the average bid-ask spread tightened 17 basis points, to 116 bps. Both figures remain less than 40 basis points wider than their February tights. From a price distribution standpoint, in August alone, sub-90 trading volume decreased seven percentage points to a 14% market share while the 98 and above cohort reported a massive eighteen percentage point increase, to 48%. Traders were even willing to once again pay above par in the secondary for stronger credits, which drove par-plus trading volume to double, to a 5% share.