The uncertain US macroeconomic backdrop with inflation pressures, interest rate hikes, and a potential recession was a significant focus throughout 2023. Despite these challenges, we see three compelling reasons to consider investing in senior secured loans now. This is an excerpt from our latest whitepaper, The case for senior loans. For a deep-dive into the sector and our outlook, read the complete paper.
Current income is comprised of two key components—base interest rates (which are expected to stay higher for longer) and credit spreads (which continue to remain wide). Coupon income for bank loans today is ~9.25%, which is near its highest since 20091. Market expectations are for rates to remain higher for longer, well above pre-2022 levels. Loans have proven to provide consistent, stable income through varying market cycles, including recessionary periods and periods of falling rates.
Loans have virtually no duration risk (average ~45 days). The forward SOFR curve currently implies an average 3-month SOFR rate of approximately 5% over the course of 2024. This reflects the broadly adopted market view that the US Federal Reserve (Fed) will pivot to easing interest rates late in 2024 and will lower interest rates cautiously. Recent economic data has been more supportive of a higher for longer interest rate environment, benefiting higher loan coupons.
Loans have offered one of the best yields in fixed income, while providing downside risk mitigation by being senior in the capital structure and being secured by the assets of the company. Loans have offered these high yields with no duration risk. In a recessionary environment, loans offer downside risk mitigation by being senior which means they are the highest priority to be repaid in the event of default. Senior secured assets may offer added risk mitigation throughout recessionary periods.
Current loan yields and spreads look very attractive both on a historical and a relative basis, although past performance is not indicative of future returns. A loan's yield is based on both coupon payments, which is the interest return, as well as on principal return. The average coupon for loans has been 9.24%, outpacing the average high yield coupon of 6.15%1. After averaging around 245 bps less than high yield bonds over the past fifteen years, this is the first time in history the average loan coupon has surpassed that of high yield bonds. It was only around two years ago when loans were yielding ~4.80%; loans recently have been yielding over 400 basis points more than that1.
Learn more and read the complete whitepaper.
The case for municipal bonds
US municipal bonds are worth considering for European investors portfolios as they may provide a source of diversification and for their relative value compared to Euro corporate bonds.
Monthly fixed income update
Following the bounce in March, fixed income markets performed poorly in April, as rate cut expectations were pushed back once more. Read our latest thoughts on how fixed income performed and what we think you should be looking out for in the near term.
Coming down the mountain: Why the descent from peak interest rates should be favourable for corporate bonds
Matthew Chaldecott thinks that there is a window of opportunity in corporate bonds, with the environment looking favourable for returns in 2024 as policy rates fall. Find out what investors can expect as we “come down the mountain”.
1Credit Suisse as of March 31, 2024.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Most senior loans are made to corporations with the below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid. Compared to investment grade bonds, junk bonds involve greater risk of default or price changes due to changes in the issuer’s credit quality. Diversification does not guarantee of profit or eliminate the risk of loss.
Source: Invesco, data as at 31 March 2024, unless stated otherwise.
This is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only. It should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions. They may differ from those of other investment professionals. They are subject to change without notice and are not to be construed as investment advice.
EMEA 3605913/2024
