Senior Loan Talking Points

Performance across financial markets largely firmed during the shortened holiday week, with investors mainly focused on a few economic prints and Fed speak. The US loan market, as represented by the Morningstar LSTA US Leveraged Loan Index (Index), returned 0.14% for the seven-day period ended September 4. Returns were driven by coupon carry, as the weighted average Index bid price declined by three basis points (bps) to 97.18. However, this primarily reflected the continued underperformance of the CCC cohort, as bid prices for BB and B-rated loans modestly increased. 

The primary market picked up right where it left off before the holiday-induced slowdown in late August, as arrangers brought to market a bevy of new opportunistic deals. With this rush of issuance, MTD volume has already totaled over $10 billion in just a few days. Looking ahead, net of approximately $28.3 billion of anticipated repayments that aren’t associated with the forward calendar, repayments outstrip supply by roughly $12.7 billion, compared to repayments outstripping supply by $13.7 billion last week. 

Market participants continued to focus on earnings news, as more issuers reported quarterly results this week. Overall, second-quarter earnings for loan issuers continue to be favorable with resilient top lines despite increasing tariff-related pressure, as companies prudently manage respective cost structures. Away from earnings, secondary trading levels were slightly firmer this week for stronger rated cohorts, while riskier credits extended their weakness. 

Given the shorter week, CLO managers priced just two new deals this week, pushing YTD issuance to 141.3 billion. Elsewhere, retail loan funds recorded an inflow of $99 million for the week ending September 4, according to Morningstar, snapping a three-week streak of outflows and providing the strongest weekly performance since early August. 

There were no new defaults in the Index this week.

August 2025 was marked by a sharp reassessment of labor market strength and a growing conviction around rate cuts. The month began with the release of the July payroll report, which showed a 73k job gain versus the 110k expected, but the real surprise came from the 258k downward revision to the prior two months. This revision showed that the US economy added just 106k jobs over the last three months, a stark slowdown that reshaped market sentiment. Treasury yields rallied as investors priced in a more aggressive pace of rate cuts and tempered medium-term growth expectations. On the other side of the ongoing monetary policy debate, inflation data offered little to slow this shift in rate expectations. Core Consumer Price Index (CPI) rose to 3.1% from 2.9%, and Core Personal Consumption Expenditures (PCE) edged up to 2.9% from 2.8%, both in line with forecasts. While these figures confirmed persistent inflation pressures, they lacked the surprise factor needed to derail the growing narrative of more rate cuts. The tone was further solidified by Federal Reserve Chair Jerome Powell’s remarks at Jackson Hole, where he emphasized the delicate balance in the labor market, as slowing demand is being offset by declines in immigration and labor force participation. Interest rates finished the quarter lower, while broader credit spreads were mostly unchanged and remain at YTD tights. As a result, fixed income sectors largely delivered positive total returns for the month. 

Against this backdrop, the US loan market reflected some softness in secondary prices given the mixed macro backdrop. The Index returned 0.45% for the month, which is the weakest total return since April. Market value returns, which represent changes in secondary trading levels, were negative in August at -0.21%, as the weighted average bid price of the Index fell by 22 bps to 97.19. With the weaker market sentiment, CCCs were notable underperformers during the month (-0.76%), while BBs and Bs both modestly outperformed the Index. Single-Bs have outperformed all ratings on a YTD basis, although their outperformance is a function of a higher level of coupon carry versus BBs, which have held in better on a market value basis. 

Primary market activity was notably lower compared to last month’s record pace but was still relatively busy when looking at historical norms. August is typically a very quiet month in the asset class. Including repricings, total institutional activity decreased to $51.8 billion from the record of $224 billion set last month. However, total monthly issuance was well ahead of the August monthly average of just $25 billion over the past decade. The use of proceeds reflected a diverse mix of repricings, refinancings and acquisition-related deals. Ex-repricing transactions, total volume was $27.8 billion for the month, bringing YTD issuance to $307 billion, about 7% below last year’s tally. Of that amount, roughly $14 billion represented net new supply, the highest for any August since 2017. On the demand side, CLO issuance remained healthy at $18.5 billion across 38 new deals, which is above the 2025 monthly average of $17.7 billion and 36 deals. YTD issuance has now crossed $141 billion and is up 8% on a year-over-year basis. Meanwhile, retail loan funds, which include all mutual funds and ETFs tracked by Morningstar, saw a modest net outflow of $124 million. This snaps the streak of three consecutive months of inflows into the asset class, while YTD flows remain deep in the negative territory due to April’s significant outflow of $10 billion. 

The loan payment default rate rose to 1.36% by principal amount, with one Index default experienced during the month (Anastasia Beverly Hills), while no issuers rolled off the trailing 12-month tally. By issuer count, the default rate climbed to 1.36%, from 1.25% in July. On the other hand, when looking at the combined default rate that’s inclusive of liability-management exercises (LMEs), LCD’s dual tracker eased to 4.37% (by issuer count), from 4.56% last month, as one issuer joined and five rolled off. We expect defaults in the loan market to continue to skew heavily towards distressed exchanges and LMEs.