It has been a rollercoaster ride of a summer in the leveraged loan and high-yield (HY) bond secondary markets, where average pricing continues to follow the lead of the latest economic headlines. Both loans and bonds saw pricing appreciate in July, with average bids on term loans reaching a summer high of 94.21 on 12 August, and bonds following suit and hitting a high of 91.56. The rally, which failed to fully recover the losses incurred in June, was cut short by volatility leading up to Federal Reserve Chairman Jerome Powell’s comments at the Jackson Hole Economic Symposium, where fiery rhetoric and promises to rein in inflation sent some debt investors packing. Following the comments, bids fell by a point in the loan market and over four points in the bond market.
The commitment by the Fed to fight inflation, paired with fresh payroll and employment data in September indicating the US labor market has so far shrugged off the impact of monetary tightening, enforced the idea of the Fed achieving a ‘soft landing’, and optimism in the secondary markets commenced yet again. Loan bids improved 20 basis points (bps), while bond pricing jumped 150bps from 6-12 September. Following Monday’s inflation reading, showing the Consumer Price Index increasing month-over-month and hinting that inflation may be more engrained than hoped, bids have once again swung negative, sliding 13bps, with bond pricing tumbling 130bps lower.
Mixed messages: conflicting economic readings fuel summer volatility
Movements in average loan and bond pricing in the days following the release of new economic indicators, inflation readings, and comments from the Fed can be telling about where future pricing is expected to head. Following the latest inflation reading, bond prices fell 101bps, the largest drop since the days leading up to the Jackson Hole Symposium in August. Loan pricing followed suit, though floating-rate instruments have withstood interest rate-related shocks better than their fixed-rate counterparts in the bond market.
Throughout the summer, loan bids have remained below a ceiling of 95, and bond pricing has remained below the 93 mark. As new data is released and digested by the market, turning optimistic sentiment negative and vice versa, rallies have been interrupted, and downswings have been reversed.
All eyes will be on the Fed’s September policy meeting, where most investors are anticipating a third 75bps hike in the Federal Funds Rate. Leveraged loan and HY bond investors can expect more swings in pricing ahead of any such moves, and prolonged volatility, as the Fed is expected to hold rates at elevated levels until price stability is achieved, and inflation is brought back down towards the 2% mark.
In and out: CLO issuance slides, while bond investors cash out
CLOs, the largest buyers of leveraged loans, have seen issuance hold up relatively well this year though the pace has slowed in recent months, with August new-issue volume of USD 7.6bn representing a 46% decline from the July figure. That said, new CLO issuance is down only 17% year-to-date. Refinancings have been largely absent from the market this year, accounting for only USD 4.4bn of CLO issuance to date, and a 95% slump from 2021, while resets have tumbled 79% year-over-year to USD 17.9bn, and the market is yet to see a reissue in 2022. A prolonged slowdown in CLO issuance could spell further trouble for loan investors.
Meanwhile, HY bond investors have been abandoning ship, with outflows totaling nearly USD 10bn over the previous three weeks, according to Lipper. The exodus of investment has erased the USD 9bn inflow seen over the summer, and threatens to send bond prices below their recent floor of 87.
