JPMorgan says leveraged loans to remain top 2019 performer

Register now

Cracks may be visible in U.S. leveraged loans as volatility takes its toll on one of the best performing debt markets of the year. But investor concerns about credit are "somewhat overblown," according to JPMorgan Chase, which is predicting that 2019 will turn out to be an even better year for loans.

The second-biggest arranger of U.S. institutional loans so far this year sees recent equity volatility as just noise, and "declines in Treasury yields and tempered Fed funds expectations" to reverse. Based on that view, JPMorgan predicts leveraged loans will return 6 percent next year, a performance that would beat the 3.5 percent gain notched this year so far and would keep loans as a leader in the credit asset class.

Sure, investors are increasingly concerned that the economic cycle is showing its age and that markets are flashing signs of a looming recession. But that worry isn't for 2019, says JPMorgan, since the bank believes growth will continue — albeit at a lower rate than before — and the Federal Reserve will hike rates five more time before next year ends. And default rates are forecast to stay at historically low levels of 1.5 percent for sub-investment-grade debt.

That's all good for leveraged loans, which should see robust demand from CLOs (JPMorgan is already predicting a record-busting net supply of CLOs in 2019), and continued interest from retail and institutional investors. So healthy is the leveraged loan market that JPMorgan strategists are describing it as a "highly accessible" source of capital, with new issuance volume next year just shy of 2018's 10-year high.

Wary investors may not heed the call. Leveraged loan mutual funds last week experienced their biggest outflow of the year, with $1.8 billion of withdrawals. And leverage loan prices in the secondary market continued their decline Monday, dropping to 97.23 cents on the dollar from 97.27 cents on Nov. 23, their lowest level since Dec. 4, 2016, according to the S&P/LSTA Leveraged Loan Price Index.

But according to JPMorgan, market participants "can't spend a year on the sidelines." If leveraged loans indeed remain on track to gain 6 percent next year, the debt may be too irresistible for investors to ignore.

Bloomberg News