The likelihood of the Federal Reserve achieving a ‘soft landing’ took another shot this week as the Dow Jones Industrial Average on Monday suffered its largest single-day loss since June, sliding 643 points.
A short-lived summer rally appears to have lost steam ahead of the upcoming Jackson Hole Economic Policy Symposium, where many investors are anticipating an aggressive stance from Fed chairman Jerome Powell towards combatting inflation, and clues to the likelihood of another 75 basis points (bps) rate hike. The Dow is down 3% in the past five days.
The story has been much the same in the leveraged loan and high-yield bond secondary markets, where recent gains in average trading levels have been largely erased. In the bond market, bids improved by approximately 111bps through 12 August, bringing the summer rally that began in July to a nearly six-point turnaround. The asset class has since lost 224bps, bringing average pricing back down to 89.23. Loans have seen similar movement, albeit at slightly more subdued levels – bids have fallen to 93.69 from their recent high of 94.21.
Mixed message: steep discounts on loan new issuance persist, but show signs of abating
Average original issue discounts (OIDs) have rocketed to 743bps so far in August after starting the year at only 52bps. This trend, in combination with higher average margins on new loan issuance, have pushed yields to 9.76% from just 4.29% to begin the year. The linear trend of increasing discounts month-over-month have coincided with the decline in secondary market pricing over the same timeframe.
Digging deeper into the August figure, however, shows that much like the latest debate around how to define a recession, there can be multiple sides to every statistic. Lumen Latin America on 4 August priced its USD 1.3bn loan backing its buyout by Stonepeak Infrastructure Partners at SOFR + 575bps and a whopping 82 OID. Lead bank JPMorgan initially funded the committed financing itself after failing to price
by its original 26 July commitment deadline. Excluding the deal from the August discount figures yields a much tamer, albeit it still elevated, monthly OID of 575bps.
As the summer rally carries on, issuers such as Pike Electric Corp and Corporation Service Company have been able to price their term loan Bs at discounts of 97.5 and 97, respectively. As the secondary market began to wobble, though, loans for EyeCare Partners and Asurion Corp saw discounts land lower, at 93 and 95.
Balancing act: following brief respite, most sectors see bids slide in anticipation of macro updates
Few sectors have been able to avoid the recent bout of secondary market volatility ahead of a busy schedule of economic commentary. On Thursday, a fresh round of jobless claims data will shed light on the strength of the labor market in the US, while Friday’s comments from Chairman Powell will be accompanied by an update to the personal consumption expenditure figures, a key gauge of inflation.
As such, the only sectors that have continued to see meaningful secondary price appreciation have been steel (150bps gain), construction (up 128bps) and consumer nondurables (123bps rise) – likely assisted by falling oil & gas prices over the summer months. At the other end of the spectrum, computers & electronics (111bps decline), airlines (down 101bps) and educational services (101bps decrease) have led the decliners over the same time as inflation eats into consumer discretionary spending.
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