Re: Delay in effects loop distorting badly
My best guess based on experience is that your effects loop is post master volume, as you turn up the master, the signal going to the loop is hotter. Eventually it becomes too much for the H2O to handle. This is pretty common on alot of amps, I've run into it before with a Yamaha T100 and a Soldano HR50+. Alot of Marshalls, at least the older ones, are like this too.
Not sure what you can do to fix it, I modded my Soldano so the Send was a lower level and then had more gain to pick the signal back up on the Return. I got the changes for that straight from a SLO schematic. Not sure what to tell you to do on your Traynor. You may need to find a pedal that can work at line levels, I had an old Zoom Choir chorus and delay pedal that worked in the loop of the Yamaha. FWIW, if you find one of those old Zoom Choir pedals, they sound great, one of the best chorus/delay pedals I've used, and work at line levels. They haven't made them in a number of years, they dropped those and concentrated on making the cheap multi-effect pedals that were junk IMHO.
But no, nothing is wrong with your pedal.