US Loan Market Snapshot - March 2017
9 March 2017 | Invesco Senior Secured Loans team
The US loan market (Credit Suisse Leveraged Loan Index in USD) delivered positive returns for a twelfth consecutive month, returning 0.50% in February and 1.06% year to date.
Similar to recent months, robust demand for loans continued to outpace comparatively light new primary loan supply. Because of this favorable technical backdrop and stable borrower fundamentals, loans remained well bid even as issuers utilized the strong market environment to re-price and refinance existing loans. The ongoing re-pricing wave again characterized the loan market in February, with another US$92.4 billion of re-pricing and refinancing activity completed during the month.
Despite the resulting spread compression, loans continue to provide solid volatility adjusted returns for investors. Loans and other risk assets gained during the month on generally firm earnings reporting and more encouraging economic data which emboldened the narrative that growth, and thus interest rates, are likely to trend higher as the year unfolds. Yet, after months of increasing, the 10 year Treasury yield actually dipped 6 bps to 2.39% in February, alleviating recent pressure on long duration assets. The 10 year Treasury returned 0.86% and the High Grade Bond Index returned 1.13%, while high yield bonds continued to outperform loans, with the High Yield Bond Index returning 1.56%. Like loans, the high yield market has benefited from a positive earnings season, economic optimism, and strong demand amid limited new supply. However its returns have been less impacted by re-pricing activity than loans due to the more restrictive call protection features typical of bonds.The lower yielding, higher quality BB (0.39%) and B (0.44%) ratings categories continued to underperform the CCCs (2.09%), although retail-related issuers did weigh on returns in the lower end of the ratings spectrum. The average price in the loan market was US$98.55 at the end of February with 72% of the market trading at or above par. At the current average price, senior secured loans are providing a 6.07% yield.