Leveraged finance fundamentals still look healthy relative to history despite higher rates
For the second quarter, the J.P. Morgan Leveraged Loan Index saw a return of 1.92%, benefitting from steady retail flows and collateralized loan obligation (CLO) origination. The year-to-date (YTD) return is now at 4.62%.
From a big picture perspective, the asset class continues to perform exceedingly well, both on its own and relative to others in the fixed income landscape. And, despite some concern around fundamentals and loan default rates, default rates have actually ticked down a notch to 3.1% as of end of June compared to 3.3% for the last twelve months at the beginning of the year. So far, we’re potentially on track to hit the high single-digit return that we’ve been forecasting. We believe the current default cycle will hover around 3% to 3.5% for a longer period relative to prior default cycles—but we also believe the current yield advantage more than compensates for the current risk.
Investment Partner
Bank Loans: Bank loans may be unsecured or not fully collateralized, may be subject to restrictions on resale, may be less liquid and may trade infrequently on the secondary market. Bank loans settle on a delayed basis; thus, sale proceeds may not be available to meet redemptions for a substantial period of time after the sale of the loan.
High Yield Fixed Income Securities: There is a greater risk of issuer default, less liquidity, and increased price volatility related to high yield securities than investment grade securities.
The commentary is the opinion of the subadviser. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
All investments carry a certain degree of risk, including possible loss of principal.
Past performance is not indicative of future results.