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Leveraged loans suffered biggest monthly decline in seven years

[NEW YORK] US leveraged loans suffered their biggest loss in December since mid-2011, following record-breaking fund outflows. Despite this, the floating-rate asset class eked out a slim gain for 2018.

Loans posted a 2.5 per cent loss in December, the worst since August 2011, when S&P downgraded the US. AAA credit rating and loans lost 4.4 per cent in the month. This followed a 0.9 per cent drop in November and compared to a 2.1 per cent loss for US junk bonds last month, data compiled by Bloomberg show.

Still, loans held onto a rare gain in US credit markets, rising 0.44 per cent as high-yield bonds lost 2.1 per cent and investment-grade bonds fell 2.5 per cent for the year. They also beat US equities.

Last year's return was the third worst for the S&P/LSTA Leveraged Loan Index in 20 years. Loans have had only two down years this century - once during the financial crisis in 2008 when losses ballooned to negative 29 per cent, and again in 2015 when collapsing energy prices sent returns to negative 0.69 per cent.

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There wasn't a single trading session of gains since Nov 1 save for the very last day of the year, as mutual funds sold to meet redemptions and new CLO activity slowed due to heightened volatility. The average price for loans hit the lowest in more than two years before inching up to 93.84 on Dec 31.

This year could be better for leveraged loans, if history is any guide. Returns following down years were the best in the index history, which goes back to 1997 and Wall Street prognosticators expect gains of as much as 6 per cent in 2019.