Boston, Massachusetts – Leveraged loans in the financial market saw modest gains driven by coupons over the past three months, but fell behind both investment-grade bonds and high-yield corporate credit due to declining interest rates. Loans increased by 2.09% for the quarter based on the Morningstar LSTA US Performing Loans Index.

Throughout the quarter, loan prices remained stable, with yields experiencing a significant drop. Retail fund inflows continued, while Collateralized Loan Obligation (CLO) origination remained strong. However, with minimal net new loan supply and expectations of an interest rate cut by the Federal Reserve, the asset class was kept in check.

In August, loan prices held steady as the index increased by 0.66%, with yields continuing to decline. However, retail fund flows reversed course and turned negative. In September, the Federal Reserve made a bold move by lowering its benchmark federal funds rate by 0.50 percentage points in pursuit of a softer landing for the economy. Despite the aggressive move, loans gained 0.73% for the month due to expectations of continued moderate economic growth.

All but one industry in the index posted gains for the quarter, with radio & television leading the way with a 6% increase. Cable & satellite television and all telecom also stood out with 5% and 4% gains, respectively. From a credit-rating perspective, loans rated CCC performed the best with a 4.10% gain, reflecting investor demand for higher-risk/higher-yielding credits.

Looking at supply and demand, new loans issued in Q3 totaled $205.6 billion, a decrease from the $381.7 billion seen in the previous quarter. Repricing/refinancing activities accounted for about 79% of the volume. Meanwhile, loan funds recorded $1.9 billion of outflows in Q3 compared to $6.6 billion of inflows in the previous quarter.

As of September 30, market fundamentals were considered reasonable, but loans from issuers with weak fundamentals saw lower prices. Speculative-grade credit quality deteriorated, and financial maintenance covenants are weaker now. Fidelity’s in-depth research capabilities and experienced analyst team position them well to navigate these challenges in the loan market.

The fund’s allocation to loans slightly increased to about 90% of the portfolio, while exposure to equities remained minimal. The cash allocation decreased to about 3%, reflecting an active approach to new deals. Industries like lodging & casinos and retailers were overweight in the fund, while underweights were seen in business equipment & services and healthcare.