US leveraged loans posted a steady if unspectacular month in May, with the Morningstar LSTA US Leveraged Loan Index gaining 0.51%. Beneath the surface, the market’s defining tension deepened: technicals remained firmly supportive, with a surging repricing wave and recovering CLO issuance producing a sizable supply shortage, while secondary prices stalled and the AI-driven divide between Software and the rest of the market widened to historic extremes. Issuance rebounded in headline terms, but the composition told a selective story, with higher-quality borrowers dominating and LBO activity remaining sparse.
May market highlights:
Loans gained 0.51% in May, above the trailing 12-month average of 0.42% but well below April’s 1.29%; the YTD return of 1.24% is the weakest in four years.
April’s price rally fizzled: the market-value return turned negative again, and the weighted average bid closed at 95.33.
Software loans slipped 38 bps to 87.71 while the rest of the market held steady near the top of its recent range.
Building Products displaced Software as the worst-performing sector year-to-date, down 5.41%, pressured by a weak housing market and tariff uncertainty on imported materials.
Bifurcation is increasingly defining the market: distressed and stressed paper combined accounts for roughly 12% of loans, while the par-plus share remains near 40%, underscoring a growing divide between stronger and weaker credits.
New-issue activity rebounded to $111 billion, the strongest month since January, but nearly half came via repricing amendments. LBO volume was a tepid $1.6 billion.
New-issue spreads tightened across all rating buckets, with B-minus borrowers clearing at the tightest level post-GFC, though the pool of lower-rated borrowers accessing the market remains thin.
Returns firm, prices fizzle
US leveraged loans had a relatively stable month, with the Morningstar LSTA US Leveraged Loan Index gaining 0.51% in May, down from 1.29% in April but roughly in line with the trailing 12-month average of 0.42%. Year-to-date, loans gained 1.24%, the weakest showing for any comparable period in four years, as secondary price weakness continues to blunt the benefit of elevated base rates.
The strong secondary price rally from April fizzled in May. The market-value component of returns was negative 10 bps, after a positive 69 bps reading the prior month. It has now been negative in eight of the last twelve months. The weighted average bid climbed 11 bps in the first half of May to 95.42, only to surrender most of those gains by month-end. Loans closed May at 95.33, two basis points above April’s close. Prices remain 131 bps below their 2026 starting point.
