March 18, 2021 - LSTA secondary loan trading volume remained elevated in February at $66.5B, although it was down slightly from January’s ten-month high of $67.4B. Even still, February was the second busiest trading month since last April. Moreover, average monthly trading volume has totaled $67B so far this year, a 20% rise over the previous eight-month average of $56B. Interestingly, the increase in trading activity has occurred at a time when S&P/LSTA Leveraged Loan Index (LLI) outstandings were contracting. At one point in February, LLI outstandings were down roughly $7B since year-end (noting that outstandings have climbed over the past several weeks and are now higher by $710M on the year – as of mid-March). Importantly, visible new loan demand has supported the increase in secondary activity as the market priced $12.6B in new CLOs in February (after registering their best January, $8.2B, in eight years). Even more noteworthy, loan mutual funds & ETFs raked in $4.4B of February inflows, which followed January’s four-year high of $4.5B. Loan mutual funds have certainly benefited from the recent move in rates, not to mention the re-open trade and an improving economic outlook. Just this week, the Fed sharply upgraded its 2021 GDP growth forecast to 6.5%, the largest annual output since 1984. This announcement came as the 10-year Treasury yield jumped to 1.74%, a roughly 85 basis point move higher since year-end. The recent rate increase has clearly benefited floating rate assets as exemplified by the LLI’s outperformance in 2021. Loan returns have totaled 1.8% through mid-March – more than double the return produced by the high-yield bond market and dramatically ahead of the investment-grade bond and 10-year treasury markets, which are firmly in the red this year.
Back to the February loan trading market, where the median trade price returned to the psychologically significant par price point after rising 100 basis points since December. Prior to February, the secondary briefly traded at a median bid of 100 back in January 2020 – but before that, it had not consistently traded at that level since a 26-month period ending in October 2018. Alongside higher secondary prices, LSTA/Refinitiv mark-to-market bid-ask spreads (on the traded universe of loans) also hit their own important milestone as the median bid-ask spread ended February at 55 bps – a level also not seen since October 2018. Another key metric defining today’s rip-roaring secondary market is the rapid rise in par-plus trading activity, which has nearly tripled since December, to 36% of overall volume. That figure sat at 43% prior to the onset of the COVID-19 pandemic before declining to less than 1% from March through June 2020. On the other end of the spectrum, loan trading volume at a sub-90 price point has significantly declined, to just 4% of February activity, as compared to the 45% figure that was reported just one year ago.
For more information, contact Ted Basta.