In a year noteworthy for surprises, November has certainly not disappointed. The likely prospect of a divided government in Washington, combined with the November 9 announcement of a COVID-19 vaccine, propelled all risk asset sectors sharply higher, including floating-rate loans. Even prior to the election, the loan market had continued the impressive turnaround begun after the pandemic-induced decline in March. In this Q&A, the Eaton Vance floating-rate team offers some perspective in light of the recent news and a look ahead.
Why is divided government appealing to investors?
Possibly because investors perceive a more stable environment, combined with the greater likelihood of the 2017 tax cuts remaining intact. But even before the election, the economy was showing surprising strength in unemployment and GDP growth. If the COVID-19 vaccine pans out, that would continue to boost consumer and investor psychology. However, that should be balanced with the difficult reality of the current wave of infections and the long road ahead for a vaccine rollout, even under the best of circumstances.
Can you summarize where the loan market stands after the post election surge? On the strength of the postelection rally, the total return for the S&P/LSTA Leveraged Loan Index (the Index) broke even for the year-to-date on November 5; when the dust settled on November 10, the Index had gained 1.2% for the month. The three months prior to the election ended October 31 were also very impressive, as the Index tacked on an impressive 2.34% in total return - easily the most of major fixed-income sectors.
What has been driving the returns? Like the second quarter, in the latter half of the year the CCC component to the market really led the way, but the returns definitely were positive across the entire rating spectrum. We think the recovery of the riskier tier of market is a healthy sign that loan investors have recovered from the panicky mentality that prevailed early in the pandemic, and are now evaluating loans on a case-by-case basis.
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