CLOs Cracked Like No Other Credit Market. So Now What?
Years of weak protections in leveraged loans might be coming back to bite investors.
Will the market fall in?
Photographer: Paul Ellis/AFP/Getty Images
Investors and strategists in the bond markets rarely, if ever, come out firmly against their own asset class. Rather, they opt to use language like “be selective,” “move up in credit quality” or “clean up portfolios.”
This is what’s happening now in the once red-hot market for collateralized loan obligations. In October, while U.S. stocks soared to records and high-yield bonds posted their fifth consecutive monthly gain, the pools of leveraged loans quietly faced something of a reckoning. Prices on double-B CLOs tumbled to the lowest in more than three years, according to data from Palmer Square Capital Management. In the span of about six weeks, their yields shot higher by 110 basis points while those on double-B corporate bonds dropped by 43 basis points, creating the widest spread between the two similarly rated assets since March 2016. Double-B leveraged loans themselves barely budged.