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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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.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of Jerry Webman, Ph.D., CFA / Chief Economist 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.