European Chart of the Week: 14th October
The secondary loan market moved higher again in 3Q20, gaining over 1 point, but despite the huge rebound since March prices are not yet back to pre-COVID levels. Term loans are still down around five points on average from January, having recovered 15 points of the 20-point drop in March, and only a small share of loans are now back to pre-COVID levels.
On a more positive note, leveraged loans (-1%) and high yield bonds (-1.7%) are not too far off break-even level on a total return basis, a situation not many would have predicted at the depths in March.
Since the initial tumultuous period, central banks have stepped in with stimulus, the financial markets have calmed down and investors have been able to more clearly identify winners and losers. On top of this, default rates remain low and the surge in rating downgrades has eased from the highs in March and April.
Despite the upswing in prices, investors remain cautious in this environment. On the credit fundamental side, there are still a lot of unknowns, including the future impact of COVID-19, the potential for a hard Brexit and an expected increase in unemployment. Portfolio managers point out that company earnings are well below 2019 levels but the technical pressures in the loan market are strong at the moment. Comparing market technicals to fundamentals, the current market echoes other times in recent years when central banks provided more stimulus and the market became driven more by technicals and less by fundamentals, and that’s what we are seeing right now to a large degree.
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