Historically, participants see liquidity dry up as year-end approaches. The buy/sell ratio and relative price improvement across liquidity cohorts traded on Octaura offer deeper insights into market sentiment.

This month, we’ve seen an outperformance of the most liquid names versus the least liquid names, which continues to be a defining trend. Execution quality within these cohorts, as well as observations where these price differences widen, may serve as early indicators of market stress.

The uptick in bankruptcies for specific names across the loan market (First Brands and Tricolor namely), and continued macro and micro market crosswinds, have underscored the notion that some participants are hedging their long-term strategy due to some landmines in the market.

This observation comes on a backdrop of increased bankruptcies and year-end approaching, which could explain quality bias on loans with higher liquidity – where participants are becoming increasingly selective on where they place risk, potentially moving away from more systematic strategies.

This risk aversion is highlighted by what we see on Octaura. The difference in price between loans bucketed at 10+ liquidity by Octaura’s Liquidity Score (the most liquid on the platform), and those marked at 4-7 liquidity scores (medium to low liquidity on the platform), is at its widest point since the beginning of the year, showcasing some liquidity bias as we head into December and strategies become more defensive.

Additionally, we continue to see the outperformance of the most liquid names versus least liquid names through the month of November, with distance to mid-price of the most liquid loans on Octaura (scored 10+ by OLS) averaging .03 during the month, versus .26 for the least liquid loans (scored 3-5 by OLS).

Despite these credit risks in the market, there has been sizable growth in overall secondary loan trading volume – compared to last month, according to the LSTA, secondary loan trading volumes grew 25%, coming in at just over $95bn.

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