The US leveraged loan market closed out the third quarter on a sour note, amid a darkening outlook for the economy and increased volatility across the capital markets in late September. The Morningstar LSTA US Leveraged Loan Index lost 2.27% last month, and is now down 3.25% for the year, ranking 2022 at present as the worst year since the Global Financial Crisis. With investor demand declining, the loan market remains in flight-to-quality mode. While a handful of transactions launched into syndication last month, conditions remain most challenging, especially for lower-rated borrowers.

The bulk of last month’s losses came at the tail end of September, following the Federal Reserve's announcement of a 75 bps hike to the fed funds target rate on Sept. 21. The index declined by 1.5% in the seven trading days through Sept. 29, the worst decline for any comparable period during the third quarter. On average, loans gained nine bps every seven days in 3Q22, a significant improvement over an average loss of 0.26% during 2Q22.

September’s losses pushed the index further into the red for the year, down 3.25% through Sept. 30. This is the worst January through September performance since the index lost 8.00% in 2008 during the Global Financial Crisis. For reference, loans declined by 0.66% in the first nine months of 2020 amid the Covid-19 pandemic and gained 4.42% at this point last year.

This article originally appeared on PitchBook News