Senior Loan Talking Points

The macro environment continued to reflect rising U.S. Treasury yields, elevated rate volatility, and higher borrowing costs, which has negatively impacted recent investor sentiment even as underlying economic data remains strong. Credit spreads widened amid the volatility, with loans also coming under some modest pressure. The weakness was the most pronounced in the high yield bond market, which saw notable spread widening across CCCs. Against this backdrop, the U.S. loan market, as represented by the Morningstar LSTA U.S. Leveraged Loan Index (Index), returned -0.22% for the seven-day period ending October 1, as softness in the secondary market more than offset the benefit of elevated coupon income. 

Primary market activity moderated this week, with total institutional loan issuance declining 65% week over week to $5.2 billion. Refinancing transactions accounted for the largest share of new issuance, representing roughly $2.7 billion of volume, while acquisition-related financing also remained active. In the forward calendar, repayments now outstrip supply by $2.4 billion, compared to net supply of $1.3 billion last week. 

In the secondary market, trading levels moved modestly lower, although performance remained mixed across the market, as higherquality loans generally outperformed while weakness remained more pronounced in the CCC-rated segment, further widening the performance gap between higher-quality and lower-quality credits. 

Investor demand remained positive this week, driven by continued CLO issuance. For the week, CLO managers priced eleven new deals, bringing YTD issuance to approximately $126.08 billion. Meanwhile, U.S. retail loan funds recorded a net inflow of $88 million for the week ending September 30, according to Morningstar, following the prior week's inflow of $374 million and marking the fifth consecutive weekly inflow in the asset class, bringing the combined total to roughly $1.06 billion over the five-week span. 

This week, Leslie's Poolmart was added to the Morningstar LSTA U.S. Leveraged Loan Index default count.

September was a challenging month for risk assets, as inflation concerns, geopolitical uncertainty, and a more hawkish monetary policy outlook drove a sharp selloff in rates. Ongoing disruptions in the Strait of Hormuz heightened concerns about energy supplies, pushing both WTI crude and Brent prices higher during the period. Meanwhile, economic data remained resilient: the U.S. flash PMI expanded at its fastest pace in five years, while August nonfarm payrolls significantly exceeded expectations, with 162,000 jobs added versus 55,000 anticipated. Against this backdrop of firm growth and persistent inflationary pressure, the U.S. Federal Reserve delivered its first rate hike since 2023 and signaled that further increases may be needed to return policy to neutral. The resulting repricing of the Fed’s policy path weighed heavily on rates, with yields rising sharply across the U.S. Treasury curve and the 10-year yield ending the month at 5.29%, its highest level since 2007. The combination of higher yields and wider credit spreads drove sharp declines across most fixed-income sectors. 

The U.S. loan market returned 0.21% in September, bringing its year-to-date return to 3.29%. The asset class notably outperformed more duration-sensitive areas of fixed income during the month, supported by its floating-rate structure. Performance was underpinned by strong technicals and a continued rebound in select software names, although gains moderated in the final week as broader market volatility increased. The Index’s average bid price declined 26 bps to 95.32, resulting in a 38-bp loss from the market-value component of return. Across sectors, the software subcomponent gained 0.91%, extending its recent momentum and narrowing its underperformance relative to the broad benchmark. Conversely, building products declined by 5.3%, representing its weakest monthly return since 2020, which extended its recent streak of losses. By ratings, Single-B loans outperformed, led by the recovery in technology credits, while CCCs continued to lag as investor caution persisted. The market also remained bifurcated: 42% of loans traded above par at the end of the month, while approximately 4% of loans traded in the 80-90 price bucket and 7% traded below 80. 

Primary market activity rebounded in September, with arrangers launching approximately $50 billion of new institutional loan supply. M&A-related issuance was the key driver, accounting for nearly $31 billion of total volume and marking the busiest month since January 2022. Activity was bolstered by Paramount Skydance’s $9.5 billion-equivalent cross-border term loan B, which was upsized amid strong investor demand and represented the second-largest loan transaction of the year. Year to date, total institutional issuance has surpassed $326 billion but remains 11% below last year’s comparable pace, largely reflecting a 20% year-over-year decline in refinancing transactions. On the demand side, CLO issuance remained healthy at $14 billion across 30 deals, although it eased from August’s robust $19 billion. Year-to-date CLO issuance has now reached $126.1 billion, which is still 17% below 2025’s record-setting pace. Demand was further supported by solid inflows into retail loan funds, which recorded a net inflow of $825 million for the month, according to Morningstar. Despite the recent improvement in flows, retail loan funds remain in net outflow territory year to date, with cumulative outflows totaling approximately $2.82 billion (weekly reporting funds). ETF flows remained positive at $499 million, while mutual fund outflows totaled $3.32 billion. 

Default activity remained benign, as the trailing 12-month payment default rate declined to just 0.55% by principal amount in September, reflecting a 32 bps decrease from last month. The Index registered one payment default during the month (Leslie’s Inc), while two defaults dropped off the trailing tally. However, Pitchbook’s dual-rate tracker increased modestly to 2.97%, with a few LMEs recorded during the month. Nonetheless, the rate remains well below the recent cycle peak of 4.70% from December 2024.