March 21, 2019 - After hitting a record $76 billion in January, secondary loan trading volume decreased 11%, to $68 billion, in February. The pullback in trading though was to be expected. Volumes were sure to normalize following three consecutive record-setting months, where trading activity spiked to at least $70 billion per month – for the first time ever. Interestingly, while volumes did contract, February still tracked to the fourth busiest month on record. Furthermore, monthly market breadth (the number of distinct loans that changed hands) increased back above 1,500 loans, marking a four-month high and a 4% increase over January. Clearly, traders felt more comfortable casting a wider net across a surging secondary.
That all said, there were other reasons for the February “slow down”. First, the secondary continued to catch a strong bid market-wide. February’s advancer/decliner ratio remained bullish at 6.7:1, with 77% of loans reporting gains and just 11% reporting losses. In turn, the median trade price rallied another 50 basis points, to 98.65, as the average trade price increased 65 basis points, to 97.15. (Both figures remain 1% and 2% lower than their pre-November levels, respectively.) And while prices continued their V-shaped recovery and volatility subsided in the secondary, the primary market became energized and took on a greater emphasis for traders. To that point, new money institutional loan volume climbed to $29 billion, more than three times the amount reported in January, according to Refinitiv LPC. Second, loan mutual fund outflows (which include ETFs) decreased for the second consecutive month after totaling$2 billion in February, a 50% reduction from January.
While it’s encouraging that selling pressure from loan mutual funds moderated, February still marked the fifth straight month (and fifteenth consecutive week) that loan funds recorded outflows. But there is a silver lining to the last five months – a sizeable improvement in liquidity during times of duress. Consider this: Since last October (the previous high watermark for secondary prices), trading volumes have averaged more than $70 billion per month. When annualized, volumes over the five-month period would total north of $850 billion, or 18% higher than 2018’s record setting $720 billion. But as we are fully aware, the market is larger today than it was last year, so trading volumes should, of course, be higher. For that reason, we turn to our turnover ratio (trading volumes/divided by the size of the S&P/LSTA Leveraged Loan Index) which improved to 75% (on an annualized basis) over the past five months. Today’s 75% turnover ratio represents a five-year high and an average five percentage point increase from the annual ratios reported since 2015.
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