June 5, 2025 - The de-escalation from the higher-than-expected tariffs announced on April 2nd – “Liberation Day”- continued into May leading to a resurgence across capital markets. After declining for three straight months, secondary prices for broadly syndicated loans (BSL) jumped 93 basis points in May to 96.7 – the largest monthly gain since December 2023. These gains translated to a return of 1.55% for the month, according to the Morningstar LSTA Leveraged Loan Index (LLI). Despite the asset class’s best return in 17 months, the year to date return stands at 2%, well below the 4% return at this time last year, with performance driven by interest carry (3.3% return) and secondary bid levels a point below their highs at the beginning of the year.
Across other asset classes, the market rebound also boosted demand for high-yield bonds, which returned 1.68% in May – the best performance since last summer, according to the Bloomberg U.S. Corporate High Yield Index. In the equities market, the S&P 500 posted its highest monthly returns in 18 months (6.3%), after three months of declines. As with BSL, year to date returns for equities and HY bonds remain modest at 1.06% and 2.7%, respectively.
Back in the loan market, the secondary advanced during 18 of the 22 trading sessions in May, with 78% of loans ending the month with higher prices (compared to 12% registering lower prices). BSL prices began rebounding after April 9, when a 90-day pause to the “retaliatory tariffs” was announced. After plummeting 190 basis points earlier in April, the LLI price rose 229 basis points post-April 9 (136 basis points in the remainder of April plus 93 basis points in May). Secondary liquidity metrics also improved. The initial fallout from the “Liberation Day” tariffs led to a spike in the average bid-ask spread to130 basis points, that tightened to end May at 93 basis points, or close to pre-April 2 levels.
Another sign of the resurgence in investor demand includes the share of the secondary market priced above par, which rose to 21% in May, after dropping sharply to the 2-4% range in April. Conversely, the share of loans priced between 98 and par fell to 49% from 58% in April, as the broader secondary market traded higher. Highlighting the risk-on sentiment across capital markets, lower-rated loans outperformed in May for the first time since February. However, in the year-to-date, higher-rated loans have outperformed, with BB rated loans returning 2.3%, compared to 1.9% for B rated loans and 0.6% for CCC rated loans, per the LLI. The rebound in demand re-opened a syndicated market that was shut through most of April, albeit at higher spreads. According to LevFinInsights, $31.5 billion in institutional loans cleared the primary market in May, up from $6.2 billion in April, but well below the average of $95 billion over the last 12 months.
Wider spreads have dampened repricing activity while the uncertainty surrounding the economic climate remains a significant headwind to new issue. Clearing spreads widened across all loans in May, with single B loans pricing at an average of 373 basis points, compared to a first quarter average of 332 basis points. BB rated loans priced at 312 basis points, compared to 224 basis points in 1Q, per LevFinInsights.
On the demand side, after recording over $11 billion in outflows across March and April, demand for retail loan mutual funds and ETFs returned in May leading to a net inflow of $905 million, according to LSEG Lipper. Institutional demand also increased. CLO new issue picked up steam in the month with 42 deals pricing for $20 billion – the highest tally since November of last year. Funding costs for CLOs peaked in mid-April with BSL AAA spreads reaching 150 basis points but declined in May to 142 basis points, or approximately 25 basis points wider since reaching SOFR-era lows earlier in the year.
