Sentiment in the European leveraged loan market has taken a turn for the worse over the last couple of weeks, forcing loan issuers and investors to adjust — sometimes sharply — as a result. Loan traders have led much of this volatility, although the market looks to be taking its cue from larger moves in high yield, equities, and the U.S. market.
The secondary market illustrates the sudden shift in loan sentiment, with average bids on the S&P European Leveraged Loan Index (ELLI) rising from a summer trough of 98.41 at the start of July to a peak of 99.20 in the middle of October. Since then it has since traded steadily lower, hitting a mid-98 level this week.
Compared with other asset classes, a 75 bps fall would not be much more than a rounding error, and loans remain relatively calm when contrasted with other markets.
“High yield and the U.S. markets are importing volatility into European loans,” said a London-based fund manager. “Conditions in Europe are tough, but the market is still functioning.” Indeed, mapping the comparative performances of equities, high yield, and loans shows how the latter asset class continues to avoid the swings seen in the more heavily traded markets. – David Cox
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