Many advisors and investors have come to believe that the only benefit senior loans offer is to deliver positive performance in rising rate environments. Historically, whenever concerns about rising rates diminish, investor money often moves out of loans.
We believe these attempts to time the market are wrong for two reasons:
First, senior loans can be a good source of incremental income outside of periods of rising rates. According to Bloomberg, in the months after the Federal Reserve signaled that interest rates would likely remain stable, loans continued to deliver positive yield-driven returns.
Secondly, investors who want to adjust their allocations to senior loans should look for signals that we are approaching the end of a credit cycle. The three key indicators that can signal an end to the credit cycle are: deterioration in the quality of credit, an extreme tightening of yield spreads, and a flattening or even inversion of the yield curve.
In our view, none of these signals are present or even seems to be on the horizon. Credit quality remains high, even with an increased volume of debt. Current credit yield spreads indicate valuations are not stretched. Moreover, a steep yield curve suggests the current economic expansion may continue.
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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. Senior loans are typically lower-rated 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 OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of any investment. These views are subject to change based on subsequent developments.