Weekly MainStay Floating Rate Update
Wednesday, March 5, 2014
Thoughts on the week ended February 28, 2014.
- U.S. financial markets responded favorably to the release of mixed economic data during the week with a downward revision in Q4 2013 GDP aiding fixed-income markets by temporarily alleviating concerns about the timing of a future rise in U.S. interest rates, while equity markets hit an all-time high on the release of positive consumer sentiment and home sale data. In addition, Fed Chair Janet Yellen confirmed that tapering actions would be maintained in line with market expectations, providing continuity. As we progress into 2014, 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, 02/27/14 and J.P. Morgan Credit Strategy Weekly Update, 02/28/14).
- The loan calendar for floating rate loan issuance remains active with 18 deals announced last week totaling $10.9 billion of new money, down slightly from the 20 deals for $10.5 billion in the prior week. However, primary market activity continues to be focused on repricing/refinancing activity, which as of last week’s reports had generated 63% of this year's issuance. Technical factors continue to favor loan issuers as fund managers remain incentivized to keep fund cash balances low (Standard & Poor’s LCD Weekly Wrap, 02/27/14 and J.P. Morgan Credit Strategy Weekly Update, 02/28/14).
- Investor appetite for floating rate loan funds remained steady for the 89th consecutive week, taking in $673 million for the week ended February 26, 2014, up from $411 million of flows for the prior week. This brings 2014 YTD inflows to $5.5 billion into the asset class. Since October 2013, weekly loan inflows have averaged $630 million (J.P. Morgan Credit Strategy Weekly Update, 02/28/14).
- Secondary trading levels for loans were relatively unchanged last week with the LCD Flow-Name Composite declining 0.05% to 99.87% of par. Trading prices for many loans remain somewhat range-bound, given the volume of repricing activity taking some momentum away from secondary trading levels. As the following chart illustrates, current average prices for loans still remain at the higher end of the trading range reported over the last 12 months, despite the negative trend in price action in recent weeks (Standard & Poor’s LCD Weekly Wrap, 02/27/14):
- Loan returns were positive as the S&P/LSTA Leveraged Loan Index gained 0.06% for the week ended February 26, 2014. Consistent with last week, returns were more favorable towards lower credit quality with BB loans returning negative 0.01%, B loans gaining 0.05%, and CCC loans advancing 0.59%. YTD, the S&P/LSTA Leveraged Loan Index has returned 0.81% (Standard & Poor’s LCD Weekly Wrap, 02/27/14).
- The weekly return for floating rate loans of 0.06% underperformed other major financial assets when compared to the 0.61% return of the Merrill Lynch High Yield Index, the Merrill Lynch High-Grade Corp Index posted a gain of 0.53% for the week while the 10-year Treasury gained 0.59%. U.S. equities bounced back from the prior week, posting a positive 0.29% (Standard & Poor’s LCD Weekly Wrap, 02/27/14).
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.
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.