December 2, 2024

Navigating the loan market in a rate cutting environment

In a recent webinar led by Andrew Breiner, Regional Account Manager at Octaura, a panel of industry experts provided insights into the complexities of navigating the loan market amid a shifting rate-cutting environment. As the Federal Reserve hints at future rate cuts, the dynamics of the loan market continue to shift, which presents both opportunities and challenges for investors.

The overall sentiment from the panelists was positive. Loan market fundamentals are strong, the rate cutting environment is helping reduce interest burdens and the capital markets have accommodated a record amount of repricing and maturity extension transactions. While conventional wisdom would call for fixed rate high yield bonds to outperform floating rate loans as the Fed cuts, our panelists agreed that the opposite is likely to be true in 2025. The panelists also noted that clients continue to closely examine the basis between high-yield bonds and leveraged loans.

Liquidity and Trading

Our panelists were constructive on liquidity trends in loans and high yields. They addressed structural differences in the market that lead to lower turnover rates in loans but point to trends like electronic trading that are a tailwind. While electronic trading is not expected to replace the relationship-based model that underpins the leveraged loan market today, the consensus was there will be room for both forms of execution going forward and the result will be additive for overall loan market execution capability. Additionally, similar to other asset classes, loan investors now have access to pre-trade analytics and multiple execution channels, rather than solely relying on traditional methods like picking up the phone.

The Role of CLOs

CLOs continue to play a pivotal role in the loan market, helping to drive activity and new issuance. However, recent repricing trends present a headwind for creating an environment in which CLO equity returns will be high enough to promote robust new CLO issuance. Historically, CLOs have supported the loan market by helping to drive demand for new loans, but recent shifts driven by repricing and tightening spreads raise concerns about CLOs facing increased difficulties in meeting their return targets.

Growth in CLO ETFs and the market’s negative net supply have created positive headwinds, although challenges persist with refinancing and new issuance. The role of CLOs remains critical in driving market activity, but their continued success will depend on how well managers can navigate repricing pressures and ongoing market shits.

Looking Ahead to 2025  

With 2025 on the horizon, the loan market is expected to see increase M&A activity, as well as higher new issuance. Panelists offered the general consensus that loans will outperform high yield in 2025. As the market continues to adapt to changing conditions, investors will need to ensure they are implementing nimble strategies to take advantage of the opportunities that emerge.