For capital markets and the economy, 2022 has been a hard pivot away from the past two years of abundant credit, easy money and low inflation. Equities have seen sharp drawdowns, especially in growth-oriented parts of the market. The yield curve has bear-flattened, with the 2-year Treasury yield rising from 0.73% to 2.45%, and year-over-year Consumer Price Index (CPI) keeps climbing, with the March reading coming in at 8.5%.
While the majority of fixed-income asset classes have experienced negative returns in 2022, floating-rate asset classes — such as collateralized loan obligations (CLOs) and leveraged loans — are roughly flat on the year. For comparison, as markets closed for Good Friday, the investment-grade (IG) corporate bond index had returned -11.1% while J.P. Morgan’s CLO Index remained virtually unchanged for the year. Spreads on both corporate bonds and CLOs have widened; however, the floating-rate coupons on CLOs have protected CLO dollar prices from the rise in interest rates this year.
This week’s chart highlights the volume of AAA CLOs for sale on BWIC (bid wanted in competition). BWIC volumes rose steadily into the March Federal Open Market Committee meeting as investors sold AAA CLOs, which had outperformed their fixed-rate peers, to raise cash and rotate into other asset classes. Following the FOMC meeting, corporate credit started to outperform CLOs and sale volume in AAA CLOs slowed. BWICs picked up before the long weekend last week, coinciding with a cheapening of corporate credit relative to AAA CLOs.
An allocation to AAA CLOs heading into 2022 has proven useful as a reliable source of raising cash in an environment with rising interest rates and increased spread volatility. Investors were able to sell large amounts of CLO paper at levels, on average, three-quarters to one point lower than where they were at the start of the year. With uncertainty still running high regarding the economy, inflation, the Federal Reserve and the war in Ukraine, I would expect investors to continue using AAA CLOs as a source of cash in a volatile spread environment.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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