- Global equity and fixed income markets experienced significant volatility in Q4 2018 as a broad-based “risk-off” sentiment quickly escalated. In December, senior secured loan and high yield bond prices reached their lowest point in approximately 2.5 years driven by large investor outflows.1
- Bank loan mutual funds recorded their largest ever weekly outflow in the last week of December and their first quarterly outflow in a year.2 Meanwhile, investors withdrew $6.8 billion from high yield bond mutual funds in December, capping the asset class’s largest ever annual outflow.2
- The sell-off came at a time when corporate default rates remain near historic lows. High yield and senior secured loan defaults ended December at 1.8% and 1.6%, respectively.3
- As the chart shows, senior secured loan and high yield bond prices have since moved well off their late-December lows.
- The sharp sell-off in the fourth quarter and January rally serve as a timely reminder of how quickly sentiment can shift. In these environments, technicals (supply/demand) tend to drive prices rather than fundamentals. These periods may create opportunities for managers with the expertise and liquidity to take advantage of investments arising from the volatility.
1 Senior secured loans are represented by the Credit Suisse Leveraged Loan Index. High yield bonds are represented by the ICE BofAML U.S. High Yield Index.
2 J.P. Morgan High-Yield and Leveraged Loan Morning Intelligence, December 21, 2018, based on fund flow data from Thomson Reuters Lipper.
3 Default rates are based on data from S&P Global Market Intelligence.
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