As Markets Rose To Record Highs In October, CLOs Saw Losses
Major stock indices rose to all-time highs, but securities in the collateralized loan obligations (CLOs) market reported losses in October, according to The Wall Street Journal.
The CLO market is valued at around $680 billion and reported losses of about 5 percent in October. The losses were attributed to worries over increasing risk in complex investments.
The CLO market decline in October was not typical. According to data from S&P Global Market Intelligence, over the past 3 years, the CLO market has grown by about $350 billion. The growth was driven by demand from government pensions, hedge funds, and investors interested in yields.
“We think there’s more volatility coming,” said Maggie Wang, head of U.S. CLO strategy at Citigroup. “We recommend investors reduce risk and stay with cleaner portfolios and better managers.”
CLO managers buy bundled leveraged corporate loans using capital attained through the sale of bonds and stock to outside investors. Cash flow generated from the bundle of loans pays interest and principal on the CLO bond with excess money being distributed to the investors.
The CLO market reported a decline of 5 percent in October amid record highs from major stock indices.