Weekly MainStay Floating Rate Update
Wednesday, April 23, 2014
Thoughts on the week ended April 17, 2014.
- U.S. financial assets realized generally positive performance last week with positive economic data highlighted by retail sales and labor market indicators in conjunction with better corporate earnings releases. Floating rate did not share in the gains of the other asset classes as the loan market has taken a breather after grinding tighter thus far in 2014. As we have communicated in prior weekly updates, we continue to expect heightened volatility in financial markets from mixed economic data in conjunction with market technical forces (Standard & Poor’s LCD Weekly Wrap, 04/17/14, and J.P. Morgan Credit Strategy Weekly Update, 04/17/14).
- The loan calendar for floating rate loan issuance softened somewhat heading into the holiday week with 18 deals in market versus 22 in the prior week, but remains active with the total calendar at $11.4 billion of new money, up from the $9.2 billion in the prior week. As primary and secondary market conditions have softened in recent weeks, we have seen a decrease in repricing/refinancing activity, which so far in April has accounted for 46% of issuance vs. the Q1 monthly average of 64%. Despite the recent turn lower in loan market performance, we still believe that technical factors will continue to incentivize fund managers to keep fund cash balances low (Standard & Poor’s LCD Weekly Wrap, 04/17/14, and J.P. Morgan Credit Strategy Weekly Update, 04/17/14).
- Investor appetite for floating rate loan funds turned negative after 95 consecutive weeks of inflows with Lipper reporting loan mutual fund outflows of $249 million for the week ended April 16, 2014. We don't view this modest outflow as a signaling of any fundamental change in the floating rate market. Fundamentals still favor the asset class with low expected defaults for the foreseeable future (excluding TXU) and should provide a respite from the more aggressive market environment we have realized in Q1 2014. Despite the recent outflow, 2014 YTD inflows still total over $7.0 billion into the asset class (Standard & Poor’s LCD Weekly Wrap, 04/17/14, and J.P. Morgan Credit Strategy Weekly Update, 04/17/14).
- Secondary trading levels for loans weakened in the last week with the LCD Flow-Name Composite falling 0.21% to 99.08% of par. Trading prices for many loans remain somewhat challenged, given the volume of repricing activity taking momentum away from secondary trading levels. As the following chart illustrates, current average prices for loans are in the middle of the trading range reported over the last 12 months (Standard & Poor’s LCD Weekly Wrap, 04/17/14):
- Loan returns were negative as the S&P/LSTA Leveraged Loan Index lost 0.06% for the week ended April 16, 2014. As has been the case, loan returns favored the lower credit quality spectrum with BB and B loans returning negative 0.11% and negative 0.06%, respectively, while CCC loans advanced 0.07%. YTD, the S&P/LSTA Leveraged Loan Index has returned 1.18% (Standard & Poor’s LCD Weekly Wrap, 04/17/14).
- Floating rate posted negative returns last week and lagged the performance of other key financial assets, posting a return of negative 0.06% which lagged the returns in more duration-sensitive fixed-income sectors, including the 0.47% return of the 10-year U.S. Treasury, the 0.45% return of the Merrill Lynch High-Grade Corp Index, and the 0.07% return for the Merrill Lynch High Yield Index. The overall outperforming sector, U.S. equities, posted a 1.60% return on the S&P 500 (Standard & Poor’s LCD Weekly Wrap, 04/17/14).
The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
Standard & Poor's Leveraged Commentary & Data (LCD) Flow-Name Composite is designed to reflect the prices of the most liquid loans in the market.
The BofA Merrill Lynch U.S. Corporate Master Index (the Merrill Lynch High-Grade Corp Index) includes publicly issued, fixed-rate, non-convertible investment grade, U.S. dollar-denominated, SEC-registered corporate debt having at least one year to maturity and an outstanding par value of at least $250 million.
The BofA Merrill Lynch U.S. High Yield Master II Index (the Merrill Lynch High Yield Index) tracks the performance of below investment-grade, but not in default, U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market, and includes issues with a credit rating of BBB or below, as rated by Moody's and S&P.
The S&P 500® Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general.
A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes, and the yield of a fixed-income security.
Credit Ratings: AAA credit ratings apply to the underlying debt securities and are rated by an independent rating agency, such as Standard & Poor’s (S&P), Moody’s, and/or Fitch. S&P rates borrowers on a scale from AAA to D. AAA through BBB represent investment grade, while BB through D represent non-investment grade. Moody’s rates borrowers on a scale from Aaa through C. Aaa through Baa3 represent investment grade, while Ba1 through C represent non-investment grade. Fitch rates borrowers on a scale from AAA through D. AAA through BBB represent investment grade, while BB through D represent non-investment grade.
Treasury securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity. Interest income on these securities is exempt from state and local taxes.
All mutual funds are subject to market risk and will fluctuate in value. Before considering an investment in a floating rate fund, you should understand that you could lose money.
Floating rate funds are generally considered to have speculative characteristics that involve default risk of principal and interest, collateral impairment, borrower industry concentration, and limited liquidity. Securities purchased by the Fund that are liquid at the time of purchase may subsequently become illiquid due to events relating to the issuer of the securities, market events, economic conditions, or investor perceptions. As a result, an investor could pay more than the market value when buying Fund shares or receive less than the market value when selling Fund shares.
Foreign securities may be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developed markets. Funds that invest in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner.
Past performance is no guarantee for future results, which will vary.
The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only, and is not intended to constitute the giving of advice or the making of a recommendation. The investments or strategies presented are not appropriate for every investor and do not take into account the investment objectives or financial needs of particular investors. An investor should review with its financial advisors the terms and conditions and risks involved with specific products or services and consider this information in the context of its personal risk tolerance and investment goals.
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Fixed Income Investors is a multi-product fixed-income investment manager and a division of New York Life Investments. MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey 07054.