Leveraged loans are still useful for income investors

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HHigh-yield bonds are taking their share of the punishment as interest rates climb and leveraged loans are caught in the downtrend, but some market watchers believe high-yield bonds offer value to investors. income investors.

Assuming this call is accurate, it could bring relief to exchange-traded funds such as the Virtus Seix Senior Loan ETF (SEIX). The actively managed SEIX aims to generate high levels of current income by focusing on leveraged loans, also known as bank loans or senior loans.

Since the start of the year, leveraged loans have outperformed traditional junk bonds and some market watchers believe this scenario will continue.

“Despite the strong year-to-date outperformance of leveraged loans, the asset class continues to be fair to high yield on a relative value basis. In fact, LL/ HY are in line with historical averages (see chart) The BB-rated LL/HY spread ratio is 1.14, almost in line with the five-year average of 1.12 The unique B-rated LL/HY spread ratio is 1.14. 1.05, just inside the five-year average of 1.09”, according to Goldman Sachs research.

Junk bonds of all kinds aren’t perfect, but an asset like SEIX is useful in rising rate environments history proves it because most of the leveraged loan universe is backed by floating rate notes (FRNs). FRNs are among the least rate sensitive segments of the fixed income market, which is why investors often turn to leveraged loans when rates rise.

In other words, an ETF such as SEIX offers both income and some buffer against Federal Reserve tightening. These days, it’s an alluring combination. Additionally, surging yields in leveraged loans could be a credible buy signal.

“On the heels of the recent sell-off, LL yields entering the futures curve are now above 8% for only the fifth time since the 2008-2009 financial crisis. Historically, buying both LL and HY when yields are above 8% has generated strong forward returns,” Goldman added.

With the value available from both leveraged debt and traditional junk bonds, SEIX’s status as an actively managed ETF is all the more significant as it means managers can potentially capitalize on valuation opportunities.

“We believe that HY and LL continue to offer value. The main issues for investors to consider when investing in either or both asset classes are their views on duration and interest rates, given the convexity of HY and zero duration plus the realization of the forward curve for loans,” Goldman Sachs concluded.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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