Despite market volatility over the past two weeks, senior secured loans ended the month relatively flat, returning 0.08% in March and 1.15% year to date.1 The softer tone for loans versus recent months was contagion from a pullback in high yield where oil price volatility and significant high yield outflows drove declines. The weakness in longer duration credit also coincided with rate concerns heading into a mid-month US Federal Reserve (Fed) meeting and the subsequent failure of healthcare legislation, generating speculation over the Trump administration’s ability to deliver on other agenda items such as tax reform. Despite a more cautious sentiment taking hold, the wave of loan repricings and refinancings continued to come to market, and another $89.2 billion of activity was completed during the month.
The modest retreat in loan prices brought the percentage of loans trading above par down to 66.6% from 72% at the end of last month. Declines in high yield served as the catalyst, as oil price volatility and concerns about increasing interest rates in the first weeks of March contributed to the largest high yield outflows since December 2015. Positive for loans, the Fed increased interest rates by 25 basis points at its meeting in mid-March as expected, and it did not alter its forward guidance of two additional hikes this year.
In a month characterized by a re-appearance of volatility, loans outperformed its peer asset classes. The 10 year Treasury returned –0.12%, the High Grade Bond Index returned –0.12%, and the High Yield Bond Index returned –0.21%. The 10 year Treasury yield held flat at 2.39%, despite rising to 2.62% intra-month.2 Unlike in past months, loans’ lower yielding, higher quality “BB” (0.12%) and “B” (0.16%) ratings categories outperformed the “CCC’s” (–0.43%)1, as lower quality commodity related issuers experienced relatively more pressure. The average price in the loan market was $98.30 at the end of March.1 At the current average price, senior secured loans are providing a 6.10% yield.1
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1 S&P LCD (Leveraged Commentary and Data) as of March 31, 2017; Total returns and other data stated are for the S&P LSTA Leveraged Loan Index.
2 HY Bonds: BAML HY Master Index, High Grade Bonds: BAML High Grade Corp; data as of March 31, 2017. Returns stated are total returns.
Average loan price includes all loans January 1997 through March 2017.