In a year noteworthy for surprises, November has certainly not disappointed. The likely prospect of a divided government in Washington, combined with the November 9 announcement of a COVID-19 vaccine, propelled all risk asset sectors sharply higher, including floating-rate loans. Even prior to the election, the loan market had continued the impressive turnaround begun after the pandemic-induced decline in March. In this Q&A, the Eaton Vance floating-rate team offers some perspective in light of the recent news and a look ahead.
Why is divided government appealing to investors?
Possibly because investors perceive a more stable environment, combined with the greater likelihood of the 2017 tax cuts remaining intact. But even before the election, the economy was showing surprising strength in unemployment and GDP growth. If the COVID-19 vaccine pans out, that would continue to boost consumer and investor psychology. However, that should be balanced with the difficult reality of the current wave of infections and the long road ahead for a vaccine rollout, even under the best of circumstances.
Can you summarize where the loan market stands after the post election surge? On the strength of the postelection rally, the total return for the S&P/LSTA Leveraged Loan Index (the Index) broke even for the year-to-date on November 5; when the dust settled on November 10, the Index had gained 1.2% for the month. The three months prior to the election ended October 31 were also very impressive, as the Index tacked on an impressive 2.34% in total return - easily the most of major fixed-income sectors.
What has been driving the returns? Like the second quarter, in the latter half of the year the CCC component to the market really led the way, but the returns definitely were positive across the entire rating spectrum. We think the recovery of the riskier tier of market is a healthy sign that loan investors have recovered from the panicky mentality that prevailed early in the pandemic, and are now evaluating loans on a case-by-case basis.
Important Additional Information and Disclosures
Source of all data: Eaton Vance as of October 31, 2020, unless otherwise specified. This material is presented for informational and illustrative purposes only. This material should not be construed as investment advice, a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy; it has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and Eaton Vance has not sought to independently verify information taken from public and third-party sources. Investment views, opinions, and/or analysis expressed constitute judgments as of the date of this material and are subject to change at any time without notice. Different views may be expressed based on different investment styles, objectives, opinions or philosophies. This material may contain statements that are not historical facts, referred to as forward-looking statements. Future results may differ significantly from those stated in forward-looking statements, depending on factors such as changes in securities or financial markets or general economic conditions. This material is for the benefit of persons whom Eaton Vance reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of Eaton Vance. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It expresses no views as to the suitability of the investments described herein to the individual circumstances of any recipient or otherwise. It is the responsibility of every person reading this document to satisfy himself as to the full observance of the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country. Unless otherwise stated, returns and market values contained herein are presented in US Dollars.
In the United Kingdom, this material is issued by Eaton Vance Management (International) Limited ("EVMI"), 125 Old Broad Street, London, EC2N 1AR, UK, and is authorised and regulated by the Financial Conduct Authority. EVMI markets the services of the following strategic affiliates: Parametric Portfolio Associates® LLC ("PPA") is an investment advisor registered with the SEC and is a majority owned subsidiary of EVC. Hexavest Inc. ("Hexavest") is an investment advisor based in Montreal, Canada and registered with the SEC in the United States, and has a strategic partnership with Eaton Vance, who owns 49% of the stock of Hexavest. Calvert Research and Management ("CRM") and Atlanta Capital Management Company, LLC ("Atlanta Capital") are investment advisors registered with the SEC and are wholly owned subsidiaries of EVM This material is issued by EVMI and is for Professional Clients/Accredited Investors only.