June 2024: Outlook and Implementation
► Current coupon (+0.75%) more than offset softer loan prices (-0.40%) as demand for loans slowed on the back of lower inflation and cooling economic data, which together pulled forward rate cut expectations. Specifically, CLO creation slowed as it became increasingly challenging to find appropriately priced loans in the secondary market while the primary new issue market remains thin. This, while CLO liability spreads continued to tighten.
► The busy refinancing/repricing calendar is also effectively pricing risk lower, which is reflected in lower prices.
► June total return was 0.35%. For the quarter, loans returned 1.90%. YTD return is 4.40% – on track with our full-year guidance of 7-8%.
► Fixed rate outperformed this month, consistent with the pickup in rate cut sentiment with high yield up 0.94%, investment grade credit up 0.63%, and the 10-year Treasury Index up 1.29%. Still, YTD loans continue to outperform primarily due to the continued yield advantage.
► We expect refinancings to continue with roughly 44% of the market still priced at par or higher.
► Investment thesis remains intact - The asset class continues to post a strong year driven by a supportive economic backdrop, borrowers managing higher interest expense, a favorable technical environment, and a yield advantage relative to other fixed income asset classes.
► Risk outperformed with CCC-rated loans up 0.66%, largely due to their higher current coupons. BBs returned 0.35%, outperforming B risk which was up 0.31%. All cohorts saw market prices decline.
► All industries weighted 1% or more of the index were positive except for aerospace & defense, which declined 0.49%.