Rare Snarl-Up Seen in CLO Trading as Spooked Buyers Pull Back
(Bloomberg) -- Traders in the market for collateralized-loan obligations stood on the sidelines amid a mix of concerns from the stock selloff to a glut of new deals.
About 65 percent of CLO bonds didn’t trade Friday, while 71 percent didn’t change hands on Wednesday, according to Adam Murphy, president at capital markets trading data firm, Empirasign Strategies LLC. Investors eschewed a market that’s been saturated with new deals this quarter and as price swings in equity markets permeated trading for the debt, he said.
The CLO market has been running at a clip as demand for yield fuels a record pace of deals. The fervor drove prices on some CLO notes to post-crisis lows, prompting analysts to say the rally could start to lose its luster. Other factors may have included the end of the fiscal year in Japan, where a lot of the demand for the securities has come from recently.
“My view is that there was too much new-issue CLO in the first quarter for the market to handle, and it’s being exacerbated by some risk off concerns from equity land,” Murphy said in a message.
CLO bonds that didn’t trade included those rated in the top triple A tier as well as mezzanine notes, according to Empirasign. The number of CLO bonds that didn’t trade dropped to 14 percent on Thursday.
CLOs have in particular experienced heightened demand because they are floating rate and so benefit when borrowing benchmarks rise. The U.S. market for the debt recently received a boost when a U.S. court ruled the securities are exempt from post-crisis rules requiring managers to hang on to a portion of the deals they sell. The deadline for appealing that rule is March 26.
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