Monthly US Loan Market Update - July 2019

Jul 10, 2019 | Invesco Fixed Income

Investors’ macroeconomic concerns eased in June as the US Federal Reserve strongly hinted that it was prepared to lower interest rates to counteract economic risks posed by trade uncertainty. While the central bank’s increasingly dovish guidance served as a tailwind for most risk assets, the reaction in loans was muted. Loan issuers stand to benefit from a more accommodative central bank; however, the prospect of lower interest rates curtailed retail demand for the asset class. The outflows contributed to a stable trading technical that was otherwise supported by minimal new issue supply and persistent demand from new CLO formation. Over the final weekend of the month, the US and China held a meeting at the G-20 Summit in which Presidents Trump and Xi de-escalated the trade conflict, pledging to restart negotiations. Though a positive step towards a trade truce, the lack of clarity is likely to continue undermining business sentiment and investors’ risk appetite. The defensively positioned loan asset class thus remains a compelling allocation option having exhibited relatively low volatility throughout the past year of trade spats and evolving interest rate expectations. Overall, the senior secured loan market returned 0.24% during the month and 5.74% year-to-date, the best first half performance in 10 years.1

Loans underperformed June’s risk rally on a relative basis. High yield bonds gained 2.42%, and investment grade returned 2.28% as market sentiment improved and interest rates declined;2 the 10 year Treasury gained 1.43% as yields dropped 12 basis points to 2.01%. With a mild decrease in loan prices during the month, the percentage of loans trading above par stands at 7.9%.3 From a quality perspective, “BBs” (0.44%) outperformed “Bs” (0.16%) and “CCCs” (-0.18%) during the month.4 The average price in the loan market was $97.06 at the end of June.5 At the current average price, senior secured loans are providing a 6.46% yield inclusive of the forward LIBOR curve.5

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^1 S&P/LSTA Leveraged Loan Index as of June 30, 2019.
^2 S&P/LSTA Leveraged Loan Index and Bloomberg as of June 30, 2019. High yield represented by BAML US High Yield Index;
investment grade represented by the BAML Investment Grade Index.
^3 JP Morgan as of June 30, 2019.
^4 S&P LCD as of June 30, 2019.
^5 S&P LCD and Invesco as of June 30, 2019.