State of the Loan Market (Second of a Series)

The backdrop for US credit got a boost from several corners last week. First, the nomination of Jerome Powell to be the next Fed chief ensured monetary policy would be, if not unchanged, at least in experienced hands.

Also, the October labor report – 261,000 new jobs added– came in pretty much where economists expected. The jobless rate continues to fall, now resting at 4.1%. And remarkably doing so without sparking wage growth, helping keep inflation in check.

Finally, the House Republicans’ tax proposal lifted hopes in the business community that a stimulative fiscal program getting passed this year was a theoretical possibility.

Add these developments to the prior week’s encouraging data on third quarter GDP, showing the US economy racked up the second straight quarter over 3% or better growth. A pretty good recipe for sustained support of the capital markets.

For credit investors, this is a mixed blessing. Take bonds, for example. High-yield bond spreads have dropped to about 340 bps, closing in on the post-crisis low 335 bps reached in 2014. That’s echoed by falling loan spreads in the broadly syndicated market. But as a relative value matter, secured loans at L+375 still look fairly attractive.