Senior Loan Talking Points
Managing Director, Head of Bank Loans and Global CLOs
Weekly Notables
The macro backdrop remained supportive this week, as resilient economic data and strong corporate earnings supported market sentiment. Against this backdrop, credit spreads tightened modestly, although investors remained focused on AI-related financing needs, supply pressure, and upcoming midterm election uncertainty. The U.S. loan market, as represented by the Morningstar LSTA U.S. Leveraged Loan Index (Index), returned 0.25% for the seven-day period ending August 6, as coupon income and modest price appreciation contributed to positive performance.
Primary market activity moderated this week, with total institutional loan issuance declining 44% week over week to $7.9 billion. Refinancing transactions accounted for the majority of new issuance, representing roughly $5.7 billion of volume, while dividend recapitalizations and private debt takeouts remained active. In the forward calendar, repayments now outstrip supply by $8.3 billion, compared to net repayments of $7.5 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 improved this week, driven by continued CLO issuance. For the week, CLO managers priced six new deals, bringing YTD issuance to approximately $94.44 billion. Meanwhile, U.S. retail loan funds recorded a net inflow of $239 million for the week ending August 5, according to Morningstar, following last week's outflow of $236 million and snapping a three-week outflow streak in the asset class.
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: July 2026
In July 2026, financial markets were marked by heightened geopolitical tensions, increased investor scrutiny on the pace and scale of AI investment, and uncertainty around monetary policy. Renewed US-Iran tensions drove oil prices sharply higher, reigniting inflation concerns, with major crude benchmarks rising more than 20% before easing late in the month as escalation risks moderated. Equities reflected a reassessment of the AI trade, leaving semiconductors under pressure even as broader indices remained near record highs. Meanwhile, the Federal Reserve held rates steady at 3.50%–3.75% at the July FOMC meeting, extending its pause for a fifth consecutive meeting. Uncertainty around the Fed’s reaction function, combined with elevated oil prices, pushed Treasury yields higher—particularly at the long end of the curve—with the 30-year yield reaching its highest level since 2007. Despite increased rate volatility, corporate credit markets remained constructive, with spreads remaining largely rangebound over the period.
The U.S. loan market returned 0.79% in July, its strongest monthly gain since April. The asset class outperformed the more duration-sensitive parts of the fixed income market, which were under pressure given the sharp sell-off in rates. The average Index bid price increased 21 bps to 95.17, driven largely by a rebound in the sizable software sector. Performing software loans rose 81 bps to 86.46, compared with an 18 bps gain for non-software loans, which ended the month at 96.84. Insurance, professional services, and IT services also outperformed the broad index, while building products remained under pressure and is now the weakest-performing sector year to date (-5.13%). By rating cohort, single-B loans led July performance and posted their second-best price return in 14 months at 33 bps. Despite healthy overall market returns, CCC-rated loans remained in negative territory, highlighting continued dispersion and a still-cautious tone in the riskiest parts of the market. Thematically, there were 3 notable issuance trends in July that will likely see increased activity in the second half of the year. First, there has been increased takeouts from the private credit market into the broadly syndicated loan market. Secondly, more datacenter and GPU financing deals are making their way into the loan market. Thirdly, issuers/sponsors are starting to chip away at some of the software related 2028 maturities with lenders ending up with tighter documentation and wider spreads.
The technical backdrop strengthened in July, as the market ended the month in a modest supply shortage amid stronger CLO issuance and still-muted loan supply. Arrangers launched approximately $40 billion of institutional loan issuance, excluding repricings, broadly in line with June’s pace. However, the year-to-date loan supply of $253.2 billion continues to trail 2025 issuance levels by roughly 9% over the comparable period. July’s volume was led by opportunistic transactions, including refinancings and dividend recaps, which were supported by the firmer secondary backdrop, while M&A-related issuance declined notably. Repricing activity also increased, with more than $30 billion of loans repriced during the month. Meanwhile, investor demand was supported by stronger CLO issuance, which rose to $12.7 billion across 29 deals. Year to date, total CLO issuance has reached $93.1 billion, down 24% versus last year’s record pace. On the other hand, U.S. retail loan funds posted a modest monthly outflow of $457 million, bringing the year-to-date outflows to $6.3 billion.
There were no Index payment defaults in July. As a result, the trailing 12-month payment default rate by principal amount continued to ease and decreased by 4 bps to 0.93%. However, there were 3 new LME transactions during the month. As a result, the dual-rate tracker that combines traditional payment activity with LMEs increased by 10 bps to 2.87%. This level remains well below where it started the year at 3.35% and the recent peak of 4.70% from December 2024.
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).