Federal Reserve (Fed) uncertainty, falling commodity prices and weak global growth have led to a sell-off in many asset classes. Much of the downward pressure on senior loan prices can be attributed to technical factors: mutual fund outflows, a slowdown in Collateralized Loan Obligation (CLO) formations, and an increase in the supply of senior loans.
Why We’re Still Positive on Senior Loans
As senior loans have traded off notably, they are now available at a fairly rare discount to their par value. That provides potential for attractive price appreciation should market sentiment improve.
As of year-end 2015, senior loan fundamentals appear stronger than periods in the past when loans have traded at these levels. According to S&P Research, average leverage ratios are lower and average interest coverage ratios are higher than prior periods when loans have traded in the low 90s or lower.
Read more in our latest update on the senior loans market and our strategy.
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Short-term interest rates and longer-term treasury rates may or may not move in tandem directionally or in magnitude.
Fixed Income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Senior loans are typically lower rated (more at risk of default) and may be illiquid investments (which may not have a ready market.) Diversification does not guarantee profit or protect against loss.
These views represent the opinions of the portfolio managers and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.