It’s not just bonds that are flashing red, so too is the leveraged loan market. From Mike Larson at moneyandmarkets.com:
Ever heard of the S&P/LSTA U.S. Leveraged Loan 100 Index? Probably not. But as an investor who cares about building or preserving wealth, you should definitely pay attention to the message it’s sending out.
To briefly explain: This index tracks the performance of 100 large, higher-risk, higher-yielding loans. They have a term of at least one year, are denominated in U.S. dollars and are issued on a senior secured basis.
These kinds of loans are typically used to finance leveraged buyouts, mergers and acquisitions or other corporate actions, all of which soar at the tail end of a credit cycle. They’re usually taken out by higher-risk companies with a lot of existing debt and lower credit ratings. As a result, they’re among the first loans to sour when the economy starts breaking down, credit conditions start tightening and easy money drains out of capital markets.
With that preamble out of the way, take a look at this chart of the index …
You can see that it topped out in mid-2014 — before the recent stock market struggles. You can also see it made a “lower high” in early 2015, and has done nothing but fall since then. As a matter of fact, it just hit the lowest level in more than three years.
To continue reading: When High-Risk Loans Blow Up