Viewpoints Fundamental Risks Driving Spread Compression in Leveraged Credit Markets Spread compression between the high yield bond and leveraged loan markets reflects not just today’s technicals, but the changing composition and growing risk in the loan market.
Many investors are asking why the market for U.S. leveraged loans – which are generally considered high risk assets that are typically secured debt (secured by a company, borrower, or assets) – has recently been pricing a similar (and by some calculations, greater) premium than the unsecured and theoretically “riskier” U.S. high yield market. Some observers cite weaker demand for loans as the driving factor behind this spread compression (i.e., the relative difference in loan and high yield spreads above like-maturity U.S. Treasuries). But we believe there’s a more fundamental driver: a transformation in the overall risk composition of the leveraged loan market.Relative risks To Read the Full Article Log In Or Register
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