A good weekly outflow: Must-know loan market outlook

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Must know: The weekly high yield bonds and leveraged loans update (Part 8 of 8)

(Continued from Part 7)

Leverage loan optimism

Both U.S. equity and bond market rallied last week on cues of a drop in the Housing Market Index and the Empire State Manufacturing Index. SPDR S&P 500 ETF Trust (SPY) and Vanguard Total Bond Market ETF (BND) prices were down by 10bps and 2bps, respectively. Treasury yields were mixed throughout the last week with modest movement in the ten-year note which was down by 1bp and the 30-year bond remained unchanged. The BAML Index, which tracks the high yield bond market, remained low, leading the credit spread between the two to fall by 13bps last week. Overall, the high yield bond market prices remained stable with both high yield bond ETFs, HYG and JNK up by 1% and 4%, respectively.

Activities in the leveraged loan space picked up as investors fled to safety, while high yield bonds suffered the jitters of bad weather which took a toll in the demand for these bonds. However, despite the enthusiasm prevailing in loan market, the S&P/LSTA Leveraged Loan Index, which tracks the leverage loan market, was down by 3bps and BKLN ETF prices remained neutral.

In the short-run, the fund flows in overall bond market (BND) remained positive at $8.91 million, while the iShares 20+ Year Treasury Bond (TLT) posted a weekly outflow of $18.5 million. Major data releases last week suggested sluggishness in the U.S. economy. However, data released later in the week from private research firm Markit Intelligence indicated a sharp rebound in U.S. manufacturing in February, providing some relief to investors. Emerging markets continued to sell off on account of continued volatility across the emerging regions. Last week, Ukrainian government bonds experienced their worst ever decline amid concerns that civil war could engulf the country. The iShares MSCI Emerging Markets fund (EEM), which seeks to track the investment results of the MSCI Emerging Markets Index reported $80 million in fund outflows last week.

On the other hand, the long-term outlook on the economy remained positive with the Fed action of tapering perceived as a sign of improvement. This may pull back long-term treasury rates, which are expected to nudge the bond market, while the leverage market could still benefit due to lower interest rate risk.

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