You almost have to marvel at the resilience shown in leveraged loan pricing over the past nearly month. Prior to the Fed’s rate decision on December 16, the leveraged loan market, as with the rest of the junk bubble, was sinking fast and furiously. Since then, however, despite great financial turmoil all over the world, and even in the places which had shown strong correlations to leveraged loans before (JPY, notably), the S&P/LSTA Leveraged Loan 100 has hung in there. Perhaps Janet Yellen’s influence still holds for something in these smaller spaces, instilling a bit of confidence (though no true buying vigor) to avoid at least the onrush of further selling.
As enticing as that possibility might be to the conventional recovery narrative, I think in practice it more so conforming to something like fractal symmetry. In general terms, the selloff that preceded this pause was the largest and most intense yet, so it is easily within the realm of expectation that the counter-effect would be balanced.
As each successive selloff wave intensifies, the reset immediately thereafter seemingly gains a little more of the calendar. The current trend worked out to 18 trading days lasting through yesterday. It might be too early to dismiss today’s lower price as an end to that pause, but the indications that another selloff wave is building are too numerous to dismiss. Apologies to Yellen and the FOMC, but I don’t think it was ever going to be that easy.
Starting with the junkiest of the junk, the triple-hooks, there really wasn’t much of a retrace at all nor even really a pause through December. While there was something of a brief respite after the terrible blow up in late November and the first two weeks of December, the implied yield on the BofAML High Yield Master II Index is now at new “cycle” highs again and still rising. The last time we saw 18.68% here was September 25, 2008; the very edge of the 2008 panic. This is not to say that this segment of high yield expects something similar in financial terms, only that the probability of a similar economic outcome in devastating junk obligors can no longer be ignored.
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