Loan prices continued to recover in June, gaining 1.14% during the month and improving year-to-date returns to -4.61%.1 Early in the month, price gains were fueled by optimism regarding both the reopening of economic activity and vaccine development, anchored in the US Federal Reserve’s (the Fed) credible pledges to provide policy support. However, the gains eased towards month-end as a renewed surge in COVID-19 cases in many parts of the US caused several states to pause or reverse reopening efforts. Evidence of improving economic activity resulting from initial stages of reopening clashed with the uncertainty brought on by the reacceleration of infections caused by those reopenings. This tension between the health of the economy and the health of the population is likely to remain a key theme in the near-term.
Loans outperformed high yield bonds (0.92%) in June, but underperformed investment grade (2.55%).2 The percentage of loans trading below $80 declined from 12% to 8%, and now stands far below the peak of 57% reached on March 23, 2020.3 For a second consecutive month, the lower end of the quality spectrum outperformed in June; “BBs” (0.24%) underperformed “Bs” (1.19%) and “CCCs” (4.26%), though “CCCs” remain a clear laggard since the onset of COVID-19.1 Relatedly, the rapidly unfolding ratings downgrade cycle, which has been key contributor to loan market instability since the pandemic began, has slowed markedly since peaking in April.4 The average price in the loan market was $91.37 at the end of June.3 At the current average price, senior secured loans are providing a 7.14% yield inclusive of the forward LIBOR curve.3
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^1 S&P/LSTA Leveraged Loan Index as of June 30, 2020.
^2 S&P/LSTA Leveraged Loan Index and Bloomberg as of June 30, 2020. High yield represented by BAML US High Yield Index; investment grade represented by the BAML Investment Grade Index.
^3 JP Morgan as of June 30, 2020.
^4 Morgan Stanley as of June 30, 2020.