Monthly US Loan Market Update - March 2020

Monthly US Loan Market Update - March 2020
Monthly insights and updates from the Invesco Fixed Income team.

Fears of the economic fallout from COVID-19 drove global risk markets lower in February, and the senior secured loan market was no exception. After a calm start to the month, markets dropped precipitously in February’s final week as the number of countries reporting infections multiplied and investors across every asset class fixated on the implications of a potential pandemic. Equities declined by 8.23% during the month, and by 12.70% from their February 19th peak,1 amid a flight to quality that pushed the 10-year Treasury yield down to 1.15%. Against this backdrop, loans came under pressure, returning -1.32% in February and bringing year-to-date returns to -0.77%.2 As risk aversion set into the secondary trading environment, widened spreads causing several issuers to abandon repricing efforts and postpone opportunistic financings.

 Amid the volatility, loans outperformed high yield bonds (-1.55%) in February, but underperformed investment grade (1.29%)3 and the 10-year Treasury (3.62%) which benefited from demand for safe-haven assets. Price declines pushed the percentage of loans trading above par down from 48% to just 4%, while the percentage of loans trading below $80 rose to 5.1%.4 Despite the risk-off frenzy, “BBs” (-1.42%) underperformed “Bs” (-1.27%), though not “CCCs” (-2.09%), as sellers exited large, liquid loans to raise cash.5 The average price in the loan market was $95.40 at the end of February.6 At the current average price, senior secured loans are providing a 5.99% yield inclusive of the forward LIBOR curve.6

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^1 S&P 500 Index in USD as of Feb. 29, 2020. The S&P 500 is widely regarded as the best single gauge of largecap
U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market
^2 S&P/LSTA Leveraged Loan Index as of Feb. 29, 2020.
^3 S&P/LSTA Leveraged Loan Index and Bloomberg as of Feb. 29, 2020. High yield represented by BAML US High Yield Index;
investment grade represented by the BAML Investment Grade Index.
^4 JP Morgan as of Feb. 29, 2020.
^5 S&P LCD as of Feb. 29, 2020. 
^6 S&P LCD and Invesco as of Feb. 29, 2020.