Why investors are paying lower prices for leveraged loans
What are the current opportunities and risks in junk-rated debt? (Part 7 of 8)
Leveraged loans see price declines
The average bid price in the S&P/LSTA U.S. Leveraged Loan 100 Index touched a low of 95.7% of par on Thursday, October 16. This was the lowest level since December of 2012.
Lower prices resulted due to a number of factors. Higher market volatility last week increased investor risk aversion. Maintaining higher cash balances to fund investor redemptions also affects the demand for senior loans in the primary market and lowers prices.
Return comparisons for leveraged loans, high-yield debt, and stock market ETFs
Due to global growth concerns (refer to Part 1), returns on stock indices like the S&P 500 Index (IVV) and the SPDR MSCI World Quality Mix ETF (QWLD) were down in the week ending October 17. IVV and QWLD experienced price declines of 1.1% and 1.7%, respectively, over the week.
Returns on leveraged loans (BKLN) were also negative in the week. The prices of the PowerShares Senior Loan ETF (BKLN), fell by 0.5% over the week.
Some very positive news from the labor market and housing data in the U.S. tempered the impact of the higher market volatility at the beginning of the week. This caused stocks and high-yield bonds (HYG) (JNK) to rally towards the end of the week. High-yield debt ETFs, JNK and HYG, posted positive returns last week, both appreciating by ~1.3%.
The next section will discuss the outlook for high-yield debt.
Browse this series on Market Realist:
