June 17, 2019
The bank loan sector has continued to experience net outflows from mutual funds and ETFs this year, though as we expected, the pace of weekly outflows has been slowing compared to the end of 2018. Year to date, investors have pulled over $10 billion from bank loan mutual funds and ETFs combined, or approximately 6 percent of the assets under management as of the end of 2018. Over the past five years, flows have been loosely correlated with six-month changes in 10-year Treasury yields (see chart, top right). Our Macroeconomic and Investment Research Group believes Treasurys are overbought, so we expect to see loan outflows continue to diminish if we see a near-term bounce in rates.
Over the past five years, flows have been loosely correlated with six-month changes in 10-year Treasury yields.
Source: Guggenheim Investments, EPFR, Haver Analytics, Bloomberg. Data as of 4.17.2019.
Our Macroeconomic and Investment Research Group expects 10-year Treasury yields to rise by about 20 basis points as the Fed holds rates steady in contrast to market expectations for a near-term cut, so we expect to see loan outflows continue to diminish, and perhaps turn positive later in the year if inflation rises.
The loan market’s performance has been strong despite net outflows. The Credit Suisse Leveraged Loan index gained 3.8 percent in the first quarter of 2019, the best quarterly return since 2010. Performance across all rating categories was positive, with split-Bs as the best performing rating category, returning 5.3 percent in the quarter followed by BBs with a return of 4.2 percent. CCC loans noticeably lagged in performance with only a 2.2 percent total return for the quarter.
A 41 percent year-over-year decline in institutional loan gross issuance helped offset some of the technical weakness caused by lower demand from mutual funds. With that decline came a lower share and volume of refinancing activity compared to the same period of 2018 and previous years.
Source: Guggenheim Investments, S&P LCD. Data as of 5.31.2019.
Moreover, we found that new-issue volume of CLOs has been robust, which helped soften the impact of fund outflows. CLO volume was down only 8.7 percent year over year through the first quarter. With fund outflows continuing, CLOs have picked up a portion of the slack and have been price setters in many contexts on new issue and secondary transactions. Thus, lenders that did not shy away from credit risk in the first quarter were compensated, in our opinion, with the average term loan pricing at an average of 400 basis points over Libor, compared to an average of about 330 basis points in March 2018.
—Thomas Hauser, Senior Managing Director; Christopher Keywork, Managing Director
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
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