April 3, 2025 - Broadly syndicated loans (BSL) followed other risk assets into negative territory in March, as markets buckled under a stream of new tariff announcements from the White House. Returns for BSL slumped to -0.31%, according to the Morningstar LSTA Leveraged Loan Index (LLI), the first negative reading since October 2023 and the worst monthly performance since September 2022, as the average price for loans in the secondary declined by 84 basis points, including 20 basis points on March 31, the largest daily decline since August 2024. The corporate bond market didn’t fare any better. Returns for U.S. high-yield bonds declined to -1.02% in the month, per the Bloomberg U.S. Corporate High Yield Index, while the S&P 500 plummeted 5.6% in the month – the worst monthly return since December 2022. The economic uncertainty lowered GDP growth forecasts amid sharp declines in consumer confidence, with little relief in sight. The negative sentiment pushed investors toward safe havens, causing the yield on the benchmark 10-year Treasury to fall 35 basis points over the last two months to 4.2%. The downturn in performance over the last two months drove first quarter returns lower with the S&P down 4.27%, and high-yield bonds and BSL returning 1% and 0.48%,respectively.
In sum, after a solid start to the year when secondary loan prices reached their highest level in three years, prices have slid 130 basis points across February and March to the 96.3 context. The share of loans in the secondary registering price declines has outpaced advancers for the last two months by wide margins (8:1 in March), effectively driving the average bid-ask spread wider to 90 basis points by the end of March, from the 80-85 range earlier in the year. As in the broader capital markets, there was a flight to quality trade in BSL. The average price on BB loans dropped 53 basis points in March, compared to a drop of 97 basis points for B rated loans (which make up the majority of loans in the LLI), while risky CCC rated loans were hit hardest, dropping 145 basis points. Unsurprisingly, the industries most affected by trade tariffs experienced the largest decline. Loans to auto and auto- components borrowers fell by 152 basis points in March, while the average price for loans in the materials sector loans dropped 145 basis points in the month, according to data from the LLI.
On the demand side, open-ended mutual funds and ETFs reversed the trend so far this year, with a large outflow of $4.6 billion in March, per LSEG Lipper. This marked the first and largest monthly outflow in five months. While demand from loan funds has a long history of ebbing and flowing with market conditions,
CLO ETFs became prominent last year as their assets under management (AUM) swelled by $16 billion to $22.5 billion. However, market volatility in March led to their first recorded outflow ($363 million), per Lipper.
Despite the retail sell-off, institutional demand for CLOs was steadfast in March, adding $18.8 billion in new-issue volume, taking the first quarter total to $48.6 billion, in line with activity from a year earlier. Net issuance is much lower at $16 billion, per BofA Research because of elevated amortization and liquidation volume. Additionally, CLO reset and refinancing activity added $34 billion in March, taking the 1Q total to over $100 billion, as spreads remain favorable despite recent widening that nudged the average AAA BSL spread to 122 basis points, compared to 117 basis points a month earlier.
Turning to loan supply, market turbulence dwindled the share of loans marked above par in the secondary to 12%, from 34% a month earlier, dampening repricing activity to $7.4 billion in March, from $40 billion the previous month and
$137 billion in January, per LevFin Insights. With opportunistic deal volume down, activity in the primary was (finally) driven by LBO and other M&A related deals. Many deals underwritten at the end of last year into early 2025 priced, sending M&A volume higher to $19.6 billion in March (and $45.6 billion in 1Q, the highest level since 1Q22), according to LevFin Insights. This new net supply boosted institutional outstandings in the LLI by over $50 billion, or 3.6%, growing the institutional loan market to a record $1.47 trillion –the first meaningful growth after three years of stagnation. The increase in loan supply and the decline in visible demand from retail funds and CLOs shifted the balance toward investors, as a result, investors became more selective, and spreads widened. According to LevFin Insights, the clearing spread for B-rated loans widened by 38 basis points in March to SOFR plus 372 basis points—a five-month high—and 52 basis points wider than the multi-year low seen in January.
