Leveraged finance markets suffered their largest losses of the year over the Aug. 2 and Aug. 5 trading sessions, as investors pivoted away from risk assets and toward safe havens following a surprising job report that came in well below expectations, stoking growing concerns about the health of the US economy.
The Morningstar LSTA US Leveraged Loan Index plunged 0.55% in the Aug. 5 session, the worst daily return for the index since the collapse of Silicon Valley Bank in March 2023, following Friday’s negative 0.16% return.
The average bid of the index is now down more than 70 bps since Aug. 1, dipping to 95.84 as of the Aug. 5 close, its lowest level of 2024. The intra-year high is 96.99 on May 15. The asset class has largely seen strong returns in the year to date on the back of a significant interest return, with the index returning 4.42% through Aug. 5.
The plunge in the secondary market also threatens to kill the wave of repricing transactions that have flooded the market so far this year, totaling $454 billion through July 31. The share of loans in the Morningstar LSTA US Leveraged Loan Index priced at par or higher — a precursor for repricing deals — has plunged to just 10% as of Aug. 5, after reaching as high as 65% in mid-May and 53% as of Aug. 1. SBA Communications, one of four such transactions in market coming into this week, has already postponed the repricing of its $2.294 billion term loan B due January 2031, citing market conditions.
In high-yield bonds, risk premiums gapped up more than half a point post the employment report, as investors felt no initial inclination to chase the rapid shift in reference rates. The option-adjusted spread level for the S&P US High Yield Corporate Bond Index reached T+350 on Aug. 2, from T+297 two days earlier, lifting that spread level to a high since December 2023, when spreads were descending from last October’s high spread of T+432.
For reference, the week-to-week move marked the biggest lurch wider for premiums since mid-March 2023, post the collapse of Silicon Valley Bank. (Spreads gapped up 109 bps for the week to March 15, 2023, to T+497.) The daily spread level averaged T+402 in 2023, and it was T+410 in 2022, and T+317 in 2021.
Traders were quick to point out that spreads have a long way to go to match peak bear-market readings. Generic bonds were reported with a relatively modest drop of 1-2 points in light trading on Aug. 5.
“So far this is much more about extreme moves in Treasuries and stocks as opposed to high-yield bonds,” said one portfolio manager.
Riskier credits, however, flashed some recessionary signals after the CCC subset of the S&P index widened 72 bps from July 31 to Aug. 2. Intraday price drops of course were more pronounced among triple-C rated bonds. For example, the CCC/Caa2 rated portion of KIK Consumer Products’ June refinancing extended the Aug. 2 losses by three points to plumb a new low of 92 on Aug. 5, for a yield of about 12.7%, or T+868. The 10.75% 2032 senior unsecured notes were priced on June 27 at an OID of 98.688, to yield 11%.
Recent par offerings from sponsor-backed RR Donnelley (9.50% five-year senior secured first-lien notes rated B/B1/BB-) and Wilsonart (11% eight-year senior notes rated B-/Caa2) also descended to new lows. The RR Donnelly notes fell two points, to a 97 context and a T+678 spread, while the Wilsonart bonds dropped another 1.75 points to 93.25, or T+866. Wilsonart’s new $1.06 billion term loan B due July 2031 (S+425, 0% floor) slumped more two points from its recent break price to a 96/98 level on Aug. 5.
Last week’s print of B/B2 rated 9.50% five-year senior secured notes from Cornerstone Building Brands tumbled another three points in the Aug. 5 session, to a 94.75 context (T+742) after a weak reception from investors unhappy with the borrower’s high leverage and low EBITDA margins.
For investment-grade bondholders, these tumultuous developments are tinged with promise. Friday’s rate drop provided the best jolt to IG performance this year, after flat returns through oscillating rate progressions over the first half this year. The S&P US Investment Grade Corporate Bond Index returned 0.84% on Aug. 2, or the biggest single-session gain since mid-December, when rates were plunging — and spreads premiums shrinking — on premature hopes for a first-half rate cut.
The Aug. 2 gain capped a seven-session run in the black for the index, despite sharp spread widening at the tail end of that run as reference rates plunged. The S&P IG index widened 14 bps from Aug. 1. to Aug. 2, to T+92, reflecting the biggest week-to-week move wider in more than a year. Still, the latest level remains contained within the 2024 range (T+71-97) and it remains well through daily averages at T+115 last year and T+127 in 2022.
Moreover, even credits insulated from immediate credit concerns are seeing broad widening in their risk premiums, after investors chased spreads tighter in anticipation of eventual rate cuts. The most actively traded issue on Aug. 5 — Goldman Sachs’ recently inked 5.33% senior notes due July 2035 — traded at T+136, on average, on a move of 18 bps wider so far in August, and versus a T+117 spread at pricing for the new issue on July 16. Even with that big upturn in spreads, though, the notes traded at healthy gains to par pricing, including high trades at 101.875% of par, for yields near 5.09%.
The drastic risk-off shift of investors is further evidenced in the Treasury market, with the yield on 10-year notes plunging to just 3.76% on Aug. 5, its lowest level so far this year. The yield is down more than a full point from as high as 4.70% in May and 4.11% more recently at the end of July. The yield is now at its lowest level since mid-2023.
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