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Asset prices are off to the races, as the S&P 500 logged a 13% gain through March 31, the best quarterly showing since the summer of 2009. Credit has likewise marched higher, with the Bloomberg Barclays High Yield Index jumping 7.3%, the steepest quarterly rise since 2003, while the Markit iBoxx Leveraged Loan Total Return Index rose by 4.8% for its best quarter since 2010.
The Fed’s dovish swivel figures prominently in the bull move in credit, as interest rate futures now expect rate cuts instead of further tightening and the “QT” asset run-off is set to end in six months. At the same time, loan defaults reached a seven-year low in March as the post-2009 economic expansion is now three months shy of a record length.
Mismatch - Supply - Demand - Junk - Bond
A mismatch between new supply and demand also helps. Junk bond volumes tallied $59 billion in the first quarter, down 5.5% year-over-year and the slowest pace of issuance since 2016. On the loan side, new volume fell to $85.2 billion in the first quarter, down a hefty 68% year-over-year according to data compiled by Bloomberg.
That dearth of supply has further tilted the balance of power in favor of the borrowers. On March 22, the Financial Times reported on the “near-total control” of sellers in the leveraged loan market, a development raising “concerns that a borrower could load up on more debt, extract cash from the company or seek expensive acquisitions.” Even the sharp downdraft seen at the end of 2018 has done little to level the playing field. An unnamed fund manager told the FT that “we were hoping there would be an improvement [in terms for investors] after December’s volatility, but that doesn’t seem to be the case.”
Thursday - Report - Moody - Investor - Services
Last Thursday a report from Moody’s Investor Services noted “unprecedented flexibility” on the part of borrowers to...
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