The U.S. leveraged loan market
The U.S. leveraged loan market is composed of both leveraged loans (LQD) and high yield bonds (HYG). Leveraged loans are loans arranged by a group of investment bankers, known as “arrangers,” and then sold to institutional investors (such as mutual funds, pension fund houses, or exchange-traded funds) and commercial banks. High yield bonds share a lot of common investors, though fewer pension funds and banks and more hedge funds. A high yield bond is a debt security issued by corporations. Both leveraged loan and high yield bonds comprise the below–investment-grade fixed income market and are generally rated below BBB-.
U.S. leveraged loan financial market size
According to the Securities Industry and Financial Market Association, SIFMA, the total U.S. fixed income market size is about $38.6 trillion. Of this, U.S. Treasuries (risk-free assets) have the highest market share, with about $11.0 trillion, followed by corporate debt, which has about $9 trillion.
Corporate deb is composed mainly of investment-grade loans, leveraged loans, and high yield bonds. The high yield bond market is currently about 12% of the total U.S. corporate debt market and about 3% of the U.S. fixed income market as a whole.
Over the past 15 years, market share for the high yield bond market has reduced from about 27% in 1998 to just about 12% in 2012. On the other hand, investment-grade loans and leveraged loans have grown 10% annually over the same period.
Though high yield bond and leveraged loans are both non–investment-grade assets, they carry very different risk exposures. Please read on to the next part of this series to learn more about the difference between leveraged loans and high yield bonds.