The senior secured loan and high yield bond markets moved slightly higher throughout the shortened holiday week, as supply and demand dynamics largely drove activity. In a week heavy with economic data capped off by a disappointing nonfarm payrolls report, corporate credit markets continued to see modest inflows and ongoing spread tightening. Senior secured loans delivered another week of gains, returning 0.26% in the week ended June 2, after returning approximately 0.85% and 1.90% in May and April, respectively.1 Year to date, senior secured loans are now providing returns of approximately 4.22%, helped, in part, by strong performances from the energy sector, as well as metals and mining.1 After rising to 26.14% in mid-February, the average yield for energy senior secured loans currently stands at 18.79%.2 Though more mixed, high yield bonds also maintained an upward trajectory, returning approximately 0.06% in the week ended June 2, and are now providing year-to-date gains of more than 8.0%.3
Oil prices remained relatively stable this week as investors weighed another drop in U.S. crude oil inventories against OPEC’s decision not to freeze production. With oil prices having risen over 50% since January, there was little pressure on OPEC to take action, and expectations around a potential cap on output heading into Thursday’s meeting were negligible. Instead, rising demand in the U.S., China and India coupled with declining non-OPEC supply continue to fuel optimism that supply and demand is beginning to move back into balance. This week, the IEA reported another decline in U.S. oil inventories and said domestic crude production fell to the lowest weekly level since September 2014.4,5 After rising briefly above $50 a barrel last week, oil prices were slightly lower as some Canadian oil-sands facilities started to resume operations following last month’s wildfires and investors digested Friday’s weaker-than-expected nonfarm payrolls number.6 Energy credit remained positive, however, as energy senior secured loans and energy high yield bonds gained approximately 1.5% and 0.2%, respectively, this past week.7,8
Heading into Friday’s nonfarm payroll report, economists expected to see a deterioration in jobs growth. May’s job tally was expected to be depressed by a strike at Verizon Communications, which idled more than 35,000 employees, and a slowdown in growth as the economy moves closer to full employment.9 However, this week’s headline jobs figure of 38,000 was the weakest month of gains since 2010 and is likely to give the U.S. Federal Reserve pause ahead of its June 14–15 policy meeting.10 While average hourly earnings rose, the labor force participation rate fell and the so-called “underemployment rate” held steady at 9.7%.9 The report stuck out for its notable contrast to previous labor market reports and other economic data released this week that showed signs of economic growth. Among these was a rise in U.S. consumer spending and an improvement in the U.S. ISM manufacturing index.11,12 With solid economic data and recent hawkish comments from Fed officials as a backdrop, bets on a June or July rate hike built throughout the week only to drop meaningfully Friday after May’s jobs report cast doubt on a rate increase sometime this summer. As of Friday morning, Fed fund futures indicated only a 29% likelihood of an interest rate increase in July and a mere 4% likelihood in June. Earlier in the week, traders were pegging the likelihood of a July and June rate hike at 54% and 22%, respectively.13 Now investors turn their attention to Monday’s speech from Fed Chair Yellen, June’s FOMC policy meeting and the upcoming “Brexit” vote.
Chart of the week: Yields tighten amid subdued supply
- While May saw an uptick in new senior secured loan issuance, activity is averaging just $32.2 billion per month year to date. This extends a decline from $37.5 billion per month in 2015 and $44.0 billion per month in 2014.14
- Consequently, total year-to-date senior secured loan issuance has declined more than 12% from the pace set during the first five months of 2015.14
- One reason for the decline in year-to-date volume is the financial market volatility seen during January and February, when senior secured loan yields widened to a five-year high, driving down financing activity across the board.15
- But as senior secured loan appetite returned, investors have faced a relative dearth of new supply. This has helped yields decline from approximately 7.4% in Q1 2016 to approximately 6.7% in Q2 2016.14 For context, that is the sharpest quarterly decline since Q4 2011, when senior secured loans returned 2.72% and began a stretch of 11 consecutive quarters of positive returns.14
1 Credit Suisse Leveraged Loan Index.
2 Credit Suisse Leveraged Loan Index (energy component) based on a three-year maturity.
3 Bank of America Merrill Lynch High Yield Master II Index.
4 U.S. Energy Information Administration, http://1.usa.gov/1Fke1JG.
5 The Wall Street Journal, http://on.wsj.com/1X0tD3d.
6 Federal Reserve Bank of St. Louis, http://bit.ly/1pqqax4.
7 Credit Suisse Leveraged Loan Index (energy component).
8 Bank of America Merrill Lynch High Yield Energy Index.
9 The Wall Street Journal, http://on.wsj.com/1t64c4k.
10 U.S. Department of Labor, http://1.usa.gov/1gck641.
11 U.S. Department of Commerce, http://1.usa.gov/1cr2Y9e.
12 Institute for Supply Management, http://bit.ly/1Ky3PlI.
13 Bloomberg, based on CME data.
14 S&P Global Market Intelligence.
15 Credit Suisse Leveraged Loan Index, based on a three-year maturity.
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