Interest rate volatility observed in the first quarter continued into the second quarter of 2018. Base rates peaked in May and then retreated somewhat in June as trade tensions increased.

Economic indicators continued to point to increased economic expansion as the U.S. producer  price index (PPI) and consumer price index (CPI) showed the largest respective increases in over six years. Further the latest second-quarter estimate of real gross domestic product (GDP) growth indicated a nearly 4% increase.

In light of continued economic expansion, the Fed hiked interest rates an additional quarter-point in June and increased guidance toward two additional quarter-point rate increases in 2018 (to a total of four in 2018) and three quarter-point hikes in 2019.

In this environment of rising high-yield bond yields and shifting investor preferences toward floating-rate securities, high-yield issuance plunged, with year-to-date volume down 23% year over year. This development boded well for middle-market issuers as the search for leveraged loans is attracting new collateralized loan obligations (CLOs) and direct lenders crossing over from the broadly syndicated loan market.

In the UK the Bank of England (BOE) held rates flat this quarter, despite having previously signaled a potential need for earlier and larger interest rate hikes than the market anticipated. The European Central Bank (ECB), facing a different dynamic in the Eurozone economy, indicated that rates will remain at current levels through the summer of 2019.

Demand for illiquid middle-market issuance continues to be very strong, as demand from traditional private lenders is further enhanced by cross over investor penchant. The resulting buildup in dry powder is driving appetite for new issues and resulting in increasingly issuer friendly spreads and structures.

Capital Markets Insights Summer 2018 from Duff & Phelps

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