Monthly US Loan Market Update - November 2019

Monthly insights and updates from the Invesco Fixed Income team 

Nov 13, 2019 | Invesco Fixed Income

The ‘flight to quality’ theme continued to play out in the loan market during October with investors staying wary of lower rated issuers as Q3 earnings season got underway. Beneath the preference for higher quality, loan prices generally moved downwards as new issue supply picked up, demand remained tepid, and risk aversion colored the market. The average price in the market has neared December 2018’s lows but, unlike the uniform sell-off at the end of 2018, current price softness is driven by the lower quality end of the market while high quality loans have been comparatively stable. Overall, the senior secured loan market lost 0.45% in October, bringing year-to-date returns to 6.31%.1 Although loans have underperformed versus other credit products year-to-date, price volatility remains comparatively muted as the senior secured nature of the asset class continues to showcase an attractive risk adjusted return profile.

Loans underperformed during a month which saw the US Federal Reserve (Fed) cut rates by another 25 basis points and the trade war de-escalate for the time being, following progress towards a partial deal between the US and China. The asset class was outpaced by longer duration assets, such as high yield bonds (0.23%), investment grade (0.61%),2 and the 10 year Treasury (0.00%). Perhaps positively for loans, the Fed softened its guidance for further rate reductions, which may portend a less negative environment for retail demand going forward to the extent the Fed stays on hold. The percentage of loans trading above par fell to 24% as prices headed lower, particularly in the lower quality end of the spectrum.3 “BBs” (-0.02%) outperformed “Bs” (-0.69%) and “C CCs” (-1.34%) during the month.4 The average price in the loan market was $95.76 at the end of October.5 At the current average price, senior secured loans are providing a 6.64% yield inclusive of the forward LIBOR curve.5

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

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