CLO markets show strong demand and returns

The Federal Reserve on 1st May highlighted that inflation remains high and does not plan to cut interest rates until it is confident that inflation is slowing towards its 2% target. Despite economic uncertainties, the Fed’s decision to keep its key rate at around 5.3% relieved investors. Recent reports showing higher-than-expected prices and economic growth challenge the Fed’s belief in easing inflation. The Fed announced it would slow the reduction of its Treasury and mortgage-backed bonds purchases to prevent a shortage of reserves, while continuing to let $35 billion in mortgage-backed bonds mature each month. This move aims to ensure financial system stability without loosening financial conditions too much.

However, this policy differs from Europe, where the European Central Bank (ECB) is expected to cut rates in June. The leveraged loan market in the US is experiencing high demand, with strong returns for investors despite a recent performance stall in April. Year-to-date returns remain above average due to higher base rates. Euro leveraged loan supply has significantly increased compared to previous years, mainly driven by refinancings and repricings. The US leveraged loan default rates remain below historical averages.

CLO primary markets have seen strong issuance, supported by high demand from banks and Japanese investors, and growing interest from retail investors via CLO ETFs. The secondary CLO markets stabilised in April, with tightening spreads across capital structures.

CLOs continue to outperform traditional credit markets, with significant returns across various tranches. Senior funds focus on primary market investments for better spreads and terms, while mezzanine funds find relative value in BB-rated tranches. Equity returns are improving, with strong recent distributions and upside potential from resets and liquidations, making equity investments more attractive.

Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.

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