By Mike Kurinets, Chief Investment Officer
Key Takeaways:
The US avoided default. On June 1, both chambers of the US Congress passed the new budget and averted the imminent US government default.
Loan prices rose sharply in June. The price of leveraged loans rose nearly 1.5 points in June. Loan prices rose on each day and investor confidence began to flood back into the market.
The market anticipated a soft landing. Investor consensus seemed to indicate that it did not expect the US economy to experience a recession or a hard landing.
Inflationary pressures continued to ease. The YoY CPI came in at 4.0% vs 4.9% in May, and the MoM CPI came in at 0.1% [1]. The market interpreted the decreasing inflation numbers as a sign that Fed’s rate hikes were taking effect while the economy remained strong.
CLO liabilities tightened. On average, CLO liabilities tightened by 16 basis points in June.
The Market Perceived a Soft Landing, and Investors Returned to Risk-On
Most participants seemed to agree that despite 10 consecutive rate hikes, and with one or two additional rate hikes likely, the US economy will experience a soft landing. This realization seemed to affect all credit markets, including the leveraged loan and CLO markets.
Demand for CLO tranches, across all ratings, increased throughout the month. By the end of June, demand picked up even for lower quality CLO debt as well as for riskier CLO equity (equity positions for CLOs that seemed likely to halt cash flows to equity).
Within a matter of weeks, all of the recent concerns -- such as the regional banking crisis, an imminent US government default, and a hard landing -- seemed to disappear.
Instead of sitting on the proverbial sidelines, many investors began to add leveraged loan and CLO positions.
CLO liabilities tightened sharply in June
As loan prices rose in June, spreads on CLO liabilities tightened across every part of the CLO capital structure.
No CLOs were refinanced or reset in June.
June spread movements are below [2]:
CLO Tranche Rating | May 31, 2023 (bps) | June 30, 2023 (bps) | June Spread Change (bps) |
AAA | 183 | 168 | -15 |
AA | 245 | 218 | -27 |
A | 310 | 285 | -25 |
BBB | 550 | 515 | -35 |
BB | 960 | 955 | -5 |
Footnotes:
[1] YOY CPI is available at https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm and MoM CPI is at https://www.bls.gov/news.release/pdf/cpi.pdf.
[2] Spreads from CitiVelocity.
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