The Takeaway
In the first quarter of 2026, the Federal Reserve held the federal funds rate steady amid persistent inflation, leaving leveraged loans sensitive to movements in credit spreads rather than base rates.
The Bank of England maintained the policy rate at 3.75% at the January and February 2026 Monetary Policy Committee meetings. The European Central Bank kept the key ECB rates unchanged, maintaining the deposit facility rate at 2%.
Short- and long-term Treasury yields rose marginally by an average of 8 basis points, while medium-maturity yields increased significantly by 24 basis points.
Artificial Intelligence-related concerns in the software sector and heightened geopolitical tensions led to negative returns in the first quarter. The Morningstar LSTA US Leveraged Loan Index declined 0.55%, followed by the Morningstar Global Leveraged Loan Index with a loss of 0.67%, while the Morningstar European Leveraged Loan Index recorded the weakest performance, declining 1.05%.
The Morningstar Leveraged Loan Monitor for Q1 2026 delivers an in-depth analysis of the leveraged loan market, with a focus on the US, European, and global indexes.
With base rates largely stable, leveraged loan performance was driven primarily by widening credit spreads and deteriorating risk sentiment. Market volatility increased relative to the fourth quarter of 2025, driven by Artificial Intelligence‑related concerns in the software sector and heightened geopolitical tensions. Against this backdrop, leveraged loans began the year on a weak footing.
The Morningstar LSTA US Leveraged Loan Index returned negative 0.55%, followed by the Morningstar Global Leveraged Loan Index with a loss of negative 0.67%, while the Morningstar European Leveraged Loan Index recorded the weakest performance, declining negative 1.05% in the first quarter. Issuance activity remained broadly stable during the quarter, with modest increases across both the US and European markets.
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