June 13, 2022
Bank loans and floating rate securities may be attractive in periods of rising interest
rates due to their minimal duration and variable income features. US Treasury yields
have spiked by 75 basis points or more 16 times since 1998, and in each case, bank
loans had positive performance during that period.
Looking beyond specific periods of rising rates, bank loans have shown consistency
in performance. Since the 1997 inception of the S&P/LSTA Leveraged Loan Index,
the index has posted only 2 calendar years of negative performance as shown on
the chart below. Over the same period, the S&P 500, Bloomberg US Aggregate,
Bloomberg US Corporate, and Bloomberg US High Yield index all have additional
negative return calendar years. On a quarterly basis, the Index had positive returns
over 80% of quarters throughout the past 20 years.
S&P/LSTA Leveraged Loan Index
Source: Morningstar, June 2022. Past performance is not a guarantee of future results. Investing involves risk,
including the possible loss of principal.
Bank loans: The S&P/LSTA Leveraged Loan Index
What this means for investors
Bank loans have a long history
of positive annual total returns
and can be an option for
investors looking to add credit
risk to their portfolios. In the
current market environment,
we stress the need for active
management and fundamental
bottom-up research. The bank
loan market is susceptible to
periods of inefficiency in which
there will be likely winners and
losers in the leveraged loan
space. A disciplined approach
to research, risk management
and a focus on liquidity are
all necessary to navigate
the current inflationary environment and
interest rate pressures on
credit markets
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