August 18, 2022 - Following a difficult two-month stretch where loan prices fell hard in the secondary, trading levels surged in July alongside other risk assets. While prices rallied in July, LSTA secondary loan trading volume fell, for the second month in row, to just $58B. This is not a new trend though; we’ve witnessed the market work this way before. As downward price volatility dissipates in the secondary, trade activity slows. And then, tacking on the normal seasonality effect on trading at the tail-end of summer, it wasn’t all too surprising that July volume came in at an 8-month low. To that point, at the height of the market sell-off back in May when the Morningstar/LSTA Leveraged Loan Index return plummeted to -2.6%, trading volumes surged to $79.6B – the second busiest month on record. In June, returns still ran in the red, but improved over May and hence trade activity fell 9%. Then in July, the decline in trading was severe at 21%, but index returns hit a 21-month high 2.1%.
Even though volumes were unimpressive in July, the change in market breadth was decisive. During the May-June 2022 period, advancer and decliner percentages averaged 3% and 95%, respectively. But in July, 73% of loan prices advanced, while just 23% declined. Furthermore, the change in sentiment led to a spike in market breadth, which is measured by the number of individual loans changing hands during any given month. Despite the lower volumes, July’s monthly market breadth reading increased above 1,550 loans for the first time since April. This illustrated that traders went on to cast a wider net across the July secondary, presumably to take advantage of the higher yields being offered on performing “off the run” names, which were trading around a 90-handle. And this trend seemed to have strengthened as the month wore on, as traders became even more confident in the rally and subsequently bid up the sub-90 price segment of the market which had not been very active during the market sell-off. In turn, this reality actually caused the LSTA’s monthly average and median trade price levels to decline in July. We therefore quote daily levels for July instead, which demonstrated that the “flow side” of the market moved up roughly 200 basis points in July, into the 94-price range. Even more encouraging, this move higher has extended into August (as of the time of this writing), where bid levels are now being quoted in the mid-95 range.