During the first quarter of 2021, SRLN outperformed the Markit iBoxx USD Liquid Leveraged Loan Index by 62 bps and outperformed the S&P/LSTA U.S. Leveraged Loan 100 Index by 69 bps on a NAV basis.
During the first quarter, SRLN outperformed its benchmarks largely due to its tactical overweight to assets rated single-B or below, including credits with exposure to an economic reopening. Many of these were added at discounted levels during 2H 2020 and have outperformed as line-of-sight towards a normalization has progressed. By rating, outperformance compared to the primary benchmark was driven by positive credit selection among single-B rated assets and an overweight allocation to CCCs, whereas outperformance relative to the secondary benchmark was driven by positive credit selection across all ratings tiers. Positive credit selection within the consumer discretionary, healthcare and industrials sectors also contributed to relative outperformance, with particularly strong alpha contribution in these sectors from Carestream, Travelport, Team Health, American Airlines and Petco.
Quarter in Review
US loans outperformed all other categories of fixed income in the first quarter of 20211 against a backdrop of an improving economic recovery, generous stimulus and expectations for a sharp increase in consumer spending as vaccinations reach critical mass. In reaction, interest rates moved sharply higher with the 10-year Treasury ending March at 1.74%, up 81 bps since the end of 2020.2 This caused equity and fixed-rate credit markets to experience pockets of volatility, but loans were relatively unfazed due to their floating rate coupon and near-zero duration.
Year-to-Date 2021 Returns
Retail investors reacted to the steepening Treasury curve by withdrawing $10.6 billion from high yield funds in the quarter compared to net retail inflows of $14.0 billion for US loans.3
In a sign of improving credit fundamentals, default volume was muted in the first quarter and the last-twelve-month default rate decreased 61 bps, ending at 3.34%, an eleven-month-low.4
As we pass the one-year mark since COVID-19 drove historic dislocations in global markets, our outlook remains optimistic. Vaccination rates have increased dramatically in the US and UK, and, although we continue to closely monitor variants as well as elevated case counts in certain pockets of the world, the line-of-sight to reopening and recovery in most developed economies has not been clearer.
Markets are increasingly pricing in a robust economic recovery, but with a clear divergence between performing and stressed assets. Much of the recent outperformance has been driven by a recovery in stressed, lower-rated issuers in COVID-impacted sectors. We believe this wave may be cresting in credit as the momentum of the reopening trade has carried bonds and loans closer to fair value. As a result, careful credit selection will play a larger role in determining performance in the coming months and quarters.
Portfolio Positioning and Outlook
SRLN is currently overweight single-B and CCC-rated assets relative to benchmarks. This positioning is based in part on our view that loan market technicals will remain constructive, with continued demand being driven by new and existing CLOs as well as loan mutual fund and ETF inflows. We expect loan supply to return towards historically normal levels following depressed issuance during much of 2020. SRLN is also market-weight or overweight certain credits with exposure to the economic reopening, many of which continue to trade at discounts to par that we believe are attractive on a risk-adjusted basis. We remain optimistic about these positions but continue to closely monitor risks to the economic reopening, including vaccine hesitancy and the proliferation of SARS-CoV-2 variants.
1 S&P/LSTA Leveraged Loan Index (Loans), Bloomberg Barclays High Yield Bond Index (High Yield), Bloomberg Barclays US Aggregate Bond Index (Agg), and Bloomberg Barclays Corporate Bond Index (Investment Grade), as of March 31, 2021.
2 Bloomberg Finance as of March 31, 2021
3 JP Morgan, Lipper, as of March 31, 2021
4 JP Morgan Default Monitor, April 1, 2021
Floating-rate debt issued by corporations and backed by collateral, such as real estate or other assets.
Markit iBoxx USD Liquid Leveraged Loan Index
A barometer of the loan market which is comprised of about 100 of the most liquid, tradable leveraged loans, as identified by Markit’s Loans Liquidity service.
Investing involves risk including the risk of loss of principal.
Diversification does not ensure a profit or guarantee against loss.
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All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Investments in Senior Loans are subject to credit risk and general investment risk. Credit risk refers to the possibility that the borrower of a Senior Loan will be unable and/or unwilling to make timely interest payments and/or repay the principal on its obligation. Default in the payment of interest or principal on a Senior Loan will result in a reduction in the value of the Senior Loan and consequently a reduction in the value of the Portfolio’s investments and a potential decrease in the net asset value (NAV) of the Portfolio. Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The fund is subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal.
Prior to 02/26/2021, the SPDR Blackstone Senior Loan ETF was known as the SPDR Blackstone / GSO Senior Loan ETF.
State Street Global Advisors Funds Distributors, LLC is the distributor for some registered products on behalf of the advisor. SSGA Funds Management has retained Blackstone Liquid Credit Strategies LLC as the sub-advisor. State Street Global Advisors Funds Distributors, LLC is not affiliated with Blackstone Liquid Credit Strategies LLC.