Despite a return of volatility to the stock market, the premium that investors want on loans that are packaged and offered as bonds has hit its lowest level since the financial crisis of 2008 and 2009.
According to a report in Financial Times, the collateralized debt obligation market has been surging during the past two years, as better yields drove more buyers to that part of the investment market. That has resulted in more issuances of collateralized loan obligations to outpace last year, which in and of itself was a record.
What’s more, while stocks have been taking a pounding and are in the midst of their first correction since the early days of 2016, the credit market has been holding up. “The momentum for further spread tightening doesn’t seem to be abating, and I wouldn’t be surprised if market observers quickly forget about 100bp as a threshold and start focusing next on 90,” said Christopher Acito, CEO and CIO at credit hedge fund Gapstow Capital Partners, in the report. “The demand for CLO paper remains strong.”
Traders noted that some of the riskier parts of the CLO market did see pressure last week, but that demand for senior tranches of the collateralized debt has been weathering the selloff in the stock market. “They are trending lower from here still,” Thomas Majewski, a specialist asset manager and founder of Eagle Point Credit Management LLC, noted in the report. “CLO triple-As have yet to face a credit impairment, and the people that play at the top of the stack understand that.”
In January, stocks were surging on the back of President Donald Trump’s tax reform, which is expected to boost spending on the part of corporations. But since the start of February, stocks have been selling off over fears that a red-hot economy could result in the Federal Reserve raising interest rates more than expected this year.
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