The booming leveraged loan market is larger than the junk bond market for the first time in a decade, a sign of strong investor demand for debt that offers high yields as rates increase.
The market size grew by $33 billion last month to $1.22 trillion, its fastest pace of growth in nearly four years. That pushed the amount of outstanding loans above the high-yield bond market’s $1.21 trillion, according to data from Fitch Ratings.
Both markets are used by speculative companies for funding. Recently, companies have borrowed from the loan market for mergers and leveraged buyouts, according to Fitch. Notable issuers include Microchip Technology Inc., Unimin Corp. and Albertsons Cos., which together issued $6 billion to fund transactions.
Meanwhile, junk bond issuance is down from previous years.
Leveraged loan issuers have found a hospitable market as accelerating US growth keeps the default rate relatively low. The 12-month default rate through June is about the same as its recent trend at 2.5%, according to Fitch.
Demand was also strong as investors sought to increase yield amid rising rates. Leveraged loans typically offer interest payments that float based on the level of benchmark rates.
This has been one of the factors driving the demand for collateralized loan bonds, or CLOs, which issue bonds to institutions such as pensions and banks and use the proceeds to purchase sets of loans from companies. They have raised $66 billion so far this yearon pace for an annual record, according to S&P Global.
— Matt Wirz contributed to this article.
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