Global Fixed Income Strategy - January 2020

Monthly insights and updates from the Invesco Fixed Income team.

The senior secured loan market finished 2019 on an ebullient note, gaining 1.60% in December and raising year-to-date returns to 8.64% – one of the strongest annual returns in the past decade.1 Investors became increasingly comfortable adding risk during the month in light of the tentative ‘phase-one’ US-China trade agreement and diminishing fears of recession. The ‘flight to quality’ trade which had defined much of 2019 in the loan market began partially retracing in November, and that reversal accelerated in December. As investor sentiment improved, concerns about further downgrade risk – a headwind to lower rated credit for most of the year – faded from the foreground, enabling a risk rally. The loan market’s distress ratio (i.e. percentage of loans trading below $80) eased from November’s peak of 5.89% to 3.79% at year-end.2

Loans underperformed high yield bonds (2.11%) in December, but outperformed investment grade 
(0.33%),3 and the 10-year Treasury (-1.02%). As prices moved up during the month, the percentage of loans trading above par rose from 32% to 53%.4 “BBs” (0.88%) lagged “Bs” (1.94%) and “CCCs” (3.24%) amid the ‘risk-on’ pivot, but still outperformed both “Bs” and “CCCs” for the full year.2 The rally in stressed names was also evident at the sector level as the Energy, Retail, and Healthcare sectors all outperformed the broader market. The average price in the loan market was $96.76 at the end of December.5 At the current average price, senior secured loans are providing a 6.20% yield inclusive of the forward LIBOR curve.5

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