Senior Loan Talking Points
Managing Director, Head of Bank Loans and Global CLOs
Weekly Notables
Broader markets remained stable ahead of the holiday weekend, as economic data continued to paint a positive picture. Treasury yields moved lower mid-week following dovish comments from the Fed and moderating energy prices. The U.S. loan market, as represented by the Morningstar LSTA U.S. Leveraged Loan Index (Index), returned 0.12% for the seven-day period ending September 3, as coupon income and modest price appreciation contributed to positive performance.
In the primary market, new-issue activity remained very quiet, which is in line with the typical summer slowdown in issuance trends. In the forward calendar, repayments now outstrip supply by $7.0 billion, compared to net repayments of $5.8 billion last week.
In the secondary market, trading levels moved modestly higher, although performance was mixed across the market, as BB- and B-rated loans outperformed while weakness remained more pronounced in the CCC-rated segment.
Investor demand remained strong this week, driven by continued CLO issuance. For the week, CLO managers priced five new deals, bringing YTD issuance to approximately $112.10 billion. Meanwhile, U.S. retail loan funds recorded a net inflow of $395 million for the week ending September 2, according to Morningstar, following last week's outflow of $75 million and marking the largest weekly inflow into the asset class since May.
There were no payment defaults in the Index this week.
Source: Pitchbook Data, Inc./LCD, Morningstar LSTA US Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).
Monthly Recap: August 2026
In August, global government bond yields remained volatile amid resilient growth expectations, persistent inflation concerns and renewed fiscal worries. US treasuries initially rallied following a weaker July non-farm payrolls report and in-line inflation data, but a hawkish Jackson Hole message from new Fed Chair Kevin Warsh later reshaped rate expectations and flattened the yield curve, as markets increasingly priced in a potential September rate hike. Energy markets were also volatile amid renewed geopolitical tensions, while equities advanced on resilient economic data and strong earnings, with the technology sector among the key outperformers. In fixed income, credit spreads remained resilient, supporting positive total returns across spread sectors.
The U.S. loan market returned 0.93% in August, registering its second-best monthly return over the past twelve months, with the market value component contributing 32 bps. The software sector, a notable underperformer for much of the year, helped lift the market in August, as performing software loans gained 127 bps to 87.73, while non-software loans gained 22 bps to 97.06. At the index level, the weighted average bid price rose 41 bps, ending the month at 95.58, its highest level since January, while the share of loans trading above par increased to 42%. In addition to software, IT services and containers and packaging also posted strong results, with both sectors returning more than 2%. Despite healthy overall market returns, CCC-rated loans remained in the negative territory, underscoring continued dispersion and a cautious tone within the market.
As we approach the end of the Q2 reporting cycle for loan issuers, there’s further validation that fundamentals have continued to largely exhibit stable trends, as the strength in earnings have broadened across sectors, leverage remains well inside of recent averages, while coverage ratios have bounced off recent troughs. The technical backdrop was robust in August, as the prevailing demand/supply imbalance widened, with the market ending in a $13 billion supply shortage. Reflecting the seasonal primary slowdown, total institutional loan issuance excluding repricing transactions fell sharply to just $16 billion, most of which represented refinancing activity, while M&A-related supply totaled only $5 billion. On a YTD basis, total new issuance has amounted to $269 billion, 12% below last year’s pace. In contrast, loan demand increased notably in August, as both measurable segments of investor demand were positive for the month. CLO issuance gained momentum, with managers pricing $19 billion across 40 deals, well ahead of July’s $12.7 billion across 29 deals. Managers with captive equity continue to support CLO issuance even as arbitrage conditions remain challenged given tight underlying loan spreads. On a YTD basis, the current issuance pace of $112 billion remains well below 2025’s record-breaking pace, down 21% YoY. While no longer a significant investor constituent within the asset class, and currently estimated at roughly 7–8%, the retail channel experienced net inflows in August, as Morningstar reported $762 million of net inflows for the month. However, YTD flows remain negative at $5.5 billion.
There was one Index payment default in August and two LME defaults. The trailing 12-month payment default rate declined by 6 bps, ending the month at just 0.87%, its lowest reading since May 2025. Meanwhile, Pitchbook’s dual-rate tracker, which combines payment defaults with LMEs, finished August at 2.88%, roughly in line with July’s 2.87%. Overall default activity remains fairly benign, with the current dual-rate tracker well below its level at the start of the year, 3.35%, and the recent peak of 4.70% from December 2024. Downgrade activity saw a modest uptick during the month, as the rolling 3-month downgrade-to-upgrade ratio increased to 1.42x from 1.28x. However, the current ratio remains at a manageable level and is well below the 2.14x ratio at the start of the year.
Source: Pitchbook Data, Inc./LCD, Morningstar LSTA Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).