Monthly US Loan Market Update - June 2019

Jun 12, 2019 | Invesco Fixed Income

Investor sentiment turned sour in May as trade tensions between the US and major trading partners worsened, causing growth concerns to resurface. Specifically, US-China trade negotiations broke down unexpectedly and the Trump administration announced a new set of tariffs on Mexican imports in an effort to combat illegal immigration. With risk assets declining almost across the board, loans outperformed high yield bonds and equities, again displaying a measure of resilience from broader market volatility. Stemming from these macroeconomic-related concerns, future interest rate expectations tumbled in May as investors viewed rate cuts by the Federal Reserve as increasingly likely. As benchmark rates and the forward Libor curve moved lower, the steady stream of retail outflows from the loan asset class continued. However, a limited pipeline of new issue supply combined with persistent demand from CLO issuance to support loan prices. Overall, the senior secured loan market gave back some of April’s robust gains, returning -0.22% during the month and bringing year-to-date returns to 5.49%.1 
 

Loans performed well in May on a relative basis. High yield bonds fell -1.27%, but investment grade returned 1.43% as interest rates declined;2 the 10 year Treasury gained 3.35% as yields dropped 37 basis points to 2.13%. As loan prices dipped during the month, the percentage of loans trading above par shrank to 6.2% 3 From a quality perspective, “BBs” (-0.17%) and “Bs” (-0.26%) were in line with “CCCs” (-0.24%) during the month.4 The average price in the loan market was $97.19 at the end of May.5 At the current average price, senior secured loans are providing a 6.40% yield inclusive of the forward LIBOR curve.5

 

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^ 1 Source: S&P/LSTA Leveraged Loan Index as of May 31, 2019.
^ 2 Source: S&P/LSTA Leveraged Loan Index and Bloomberg as of May 31, 2019. High yield represented by BAML US High Yield Index; investment grade represented by the BAML Investment Grade Index.
^ 3 Source: JP Morgan as of May 31, 2019.
^ 4 Source: S&P LCD as of May 31, 2019.
^ 5 Source: S&P LCD and Invesco as of May 31, 2019.