August 17, 2023 - While prices in the secondary loan market continued their bullish push higher in July, secondary activity fell yet again.  LSTA secondary loan trading volume declined 15% to an eight-month low of $51.4B in July, a worse decline than the year-over-year 11% figure.  Putting July volumes in better context, the only other sub-$52B trading months of the past three years occurred during the seasonally slowest months of December.  Although it’s also common across asset classes for secondary volumes to tapper off during the summer slowdown (HY trading was down 11% in July but up 10% year-over-year, according to Greenwich), loan trading volumes have been running substantially lower since April.   As a result, secondary activity is off 16% from the same seven-month period of last year.  And while monthly market breadth, or the number of distinct loans traded, has contracted alongside lower volumes, loan counts have remained supportive in a high 1,400 range – as compared to a low-1,500 range during the first quarter.  But according to one prominent sell-side trader, “while we continue to see a reasonable share of bids and offers out there, price discovery remains a challenge given the volatility, which has reduced trade frequency across the market, causing a reduction in volumes.”  That reality alongside a lack of net-new lending activity coupled with a reduction in visible demand levels, goes a long way in explaining why annualized 2023 trade activity would represent a four-year low of $753B, or a 9% decline from last year.

Now on to the good news, where market sentiment remained decidedly bullish in July, as advancers outpaced decliners by a ratio of 4:1 in the secondary. In turn, trade prices experienced their strongest rally of the year, rising 175 basis points.  By the end of July, average and median trade price levels increased to 15-month highs of 96.15 and 98.75, respectively.  But it was definitely not a straight shot higher as daily aggregate bid levels advanced on just 50% of July trading sessions – exemplifying the level of volatility we are witnessing even during periods of rising prices.  Even so, bid-ask spreads continued to tighten with the average and median mark-to-market spreads on the traded universe of loans ending July at 85 and 75 basis points, respectively – also 15-month bests.   Finally, although the recent two-month rally has lost a bit of steam so far in August, bid levels are still better by five basis points on the month, based on the Morningstar/LSTA Leveraged Loan Index.  That said, the jury remains out for any improvement in trading volumes.