On August 14, 2024, as signs of a slowdown in the US economy became increasingly apparent, market investors became more cautious about junk bonds. In the past week, the trading volume of leveraged loans has significantly declined, and market sentiment has been noticeably affected.

The slowdown of the US economy is first reflected in the job market. The disappointing employment data released on August 1st and 2nd not only raised market expectations for a significant interest rate cut by the Federal Reserve, but also intensified concerns about low rated debt. In this context, borrowers have reduced their leveraged loan transactions, resulting in a significant decline in market trading volume. According to PitchBook LCD data, only six leveraged loans were sold last week, with a total value of $3.3 billion, far below this year's average of $10 billion per week.

The volatility of the market has hindered the main business of leveraged loans. Hans Mikkelsen, a credit strategist at a well-known institution, pointed out that if the Federal Reserve further cuts interest rates according to current expectations, it is undoubtedly good news for high debt borrowers, but it also means that investors can expect future returns to decrease, and the availability of financing in the leveraged loan market will also decrease accordingly.

From a technical perspective, there is a gap between market demand for junk bonds and net loan supply. Marina Lukatsky, Global Head of Credit Research at Pitchbook, stated that since the Federal Reserve began raising interest rates in 2022, this gap should persist until the end of this year. She estimated that as of July 31st, investor demand exceeded net loan supply by at least $130 billion this year. However, as we enter 2025, if the economy continues to slow down, the Federal Reserve's significant interest rate cuts may have a negative impact on the refinancing or new loan plans of certain leveraged borrowers.

In the current market environment, analysts' views also show a cautious attitude. JPMorgan Chase pointed out that leveraged loan funds had an outflow of $3.1 billion last week, the largest outflow since March 2020, including a record outflow of $2.4 billion from exchange traded funds (ETFs). This data reflects investors' uncertainty about the market and concerns about future returns.

Despite the overall cautious attitude of the market, there are still some positive signals. For example, JetBlue Airways successfully sold a five-year junk grade loan on Monday, demonstrating market confidence in certain borrowers. In addition, there were at least two leveraged loan transactions in the market on Tuesday, indicating that the market has not completely lost its vitality.

In summary, against the backdrop of a slowdown in the US economy, the junk bond market is experiencing investor caution and market volatility. Although there may be some positive trading in the short term, in the long run, economic uncertainty and the direction of the Federal Reserve's policies will continue to affect market trends.