Leveraged Loan Prices Collapse Amid Record-Breaking Outflows

For those equity traders who think they've been plunged into the darkest circle of hell with all the recent violent moves in the S&P, we dare you to take one look at the chart below and say which is worse.

Ominously, the slide in leveraged loan prices - which have collapsed in the past six weeks as a result of the events we described recently in "Wheels Come Off The Leveraged Loan Market: Banks Unable To Offload Loans Amid Record Outflows" - has trekked steadily downward in the past month even when stocks and high-yield bonds rebounded as they did on December 26 and 27. The liquidation has been so furious, that the S&P/LSTA Leveraged Loan Price Index has not had a gain in any trading session since Nov. 1.

And as prices fell, they created a feedback loop whereby lower prices led to accelerating outflows, and said outflows resulted in even more liquidation sales.

Last week was no different, as investors continued to pull money out of U.S. leveraged loan funds at a historical pace, withdrawing $3.5 billion in the week ended Dec. 26 (split between $2.9 billion in mutual funds and $626 million in ETFs),the third straight week of record setting withdrawals, following last week's then-record $3.3 billion and $2.5 billion the week prior.

According to Lipper data this is the longest string of consecutive outflows exceeding $1 billion on record.

Much of the capital that had poured into leveraged loans this year - where demand was prompted by floating yields that offered protections against rate hikes - has reversed and loan funds now stand with less than $1 billion in inflows year-to-date following $13.4 billion in total fund withdrawals since November 21, according to Bloomberg calculations.

The sliding prices, together with outflows, will likely persist well into 2019, reflecting a reset of interest rate views lower, coupled with trade-war tensions, slowing growth and energy price declines. The bearish sentiment followed a rout in equities and high-yield bonds that began in early October.

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