Market snapshot
The US leveraged loan market experienced a pronounced pullback in February, recording its steepest monthly fall since the autumn of 2022. The Bloomberg US Leveraged Loan Index posted an average price decline of 1.34% over the month, marking the most volatile stretch for the asset class since September 2022, when aggressive rate increases first raised fears of a downturn.
What is driving the selloff
At the center of the recent repricing is an intensifying concern about artificial intelligence. Investors are increasingly uneasy about the potential for AI-driven disruption to upend established business models. That anxiety has disproportionately affected companies in the software and services sectors, which market participants view as particularly exposed to technological displacement.
Distress and refinancing risks
As prices fell, the market formally moved substantial amounts of debt into what is considered "distressed" territory. For issuers rated below investment grade, this is more than a momentary markdown: debt priced at distressed levels signals a greater likelihood that those borrowers will face challenges refinancing upcoming maturities. That dynamic raises immediate concerns for credit quality and future access to financing for affected firms.
Primary market and liquidity
Liquidity pressures have accompanied the secondary-market rout. New loan issuance in the US contracted sharply, falling to its lowest monthly volume since May. This retreat in primary activity suggests both lenders and borrowers have become cautious as they reassess how AI-related risks might affect corporate credit profiles over the longer term.
Compounding the drop in supply, US loan funds recorded heightened redemption activity. Recent data show withdrawal rates from these funds at their highest since April of last year. With fewer buyers stepping in and existing holders reducing exposure, downward price pressure persisted across February.
Shift in investor focus
Credit analysis in the leveraged loan sector is showing a notable shift. Where interest-rate risk previously dominated investor concerns, the market narrative now places AI displacement risk at the forefront. That reordering has widened the valuation gap between companies perceived as potential AI "winners" and what investors consider "legacy" software providers, with the latter group under heavier selling pressure.
This account reflects the market signals and data observed in February, including the Bloomberg US Leveraged Loan Index move, sector concentration of selling, distressed pricing outcomes and changes in issuance and fund flows.