Historically senior loans have delivered positive performance during periods of rising interest rates. That has caused some investors to try to time the market and leave the loan market when fears of rising interest rates decline.

We believe attempting to time the market is wrong, for two reasons. Currently senior loans continue to deliver positive yield-driven returns even as the Federal Reserve signals that interest rates will remain stable. Moreover, instead of adjusting their allocations to senior loans based on interest rates, investors should look to signals that we are approaching the end of a credit cycle: deteriorations in credit quality, extremely tight yield curve spreads and a flat or inverted yield curve.

In our view, none of these signals have appeared. Although debt levels have increased, credit quality remains high, and valuations are not stretched, judging by current yield curve spreads. Also, the current steep yield curve leads us to believe that the current economic expansion may continue.

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