Tyields on debt securities are skyrocketing at an alarming rate, but this does not start the issuance of leveraged loans, indicating that the SPDR Blackstone / GSO Senior Loan ETF (NYSEArca: SRLN) is a fixed income exchange traded fund that investors can consider for the short term.
SRLN invests in senior loans made to companies operating in North America and outside of North America. The Portfolio may invest in senior loans through loans directly through the primary or secondary market or through participation in senior loans, which are contractual relationships with an existing lender under a loan facility. loan where the loan portfolio purchases the right to receive principal and interest payments.
Since rates are typically reset quarterly, senior loans typically have short durations – a measure of a bond fund’s sensitivity to changes in interest rates. The variable rate component also offers investors an alternative method of obtaining returns while mitigating interest rate risk. Therefore, bank loans are seen as an attractive substitute for traditional corporate debt in a rising interest rate environment.
SRLN: Right to the rate hike?
“In terms of year-over-year changes in three-month moving averages, the 10-year Treasury yield shows an inverse correlation of -0.3 with the issuance of quality bonds, zero correlation with the issuance of high yield bonds and a positive correlation of 0.41 with the issuance of leveraged loans ”, according to Moody’s Investors Service. “Everything else is the same, as Treasury bond yields rise, IG corporate bond offerings tend to fall, HY bond issues do not move back and forth, while the Leverage loan issuance is increasing. “
Senior loans from the SRLN portfolio are paid first. A higher payment priority promotes liquidity as the defaulting borrower has to sell assets in order to repay creditors – in this case, senior loans within the SRLN portfolio are given higher priority – a viable option, especially in the event of a market downturn.
“Typically, an upward trend in Treasury bond yields is the result of an improving outlook for business and corporate earnings,” adds Moody’s. “In addition, HY corporate bond default rates tend to fall amid rising Treasury yields. For HY bond issuers, improved credit quality may offset higher benchmark bond yields and, therefore, leave HY bond offerings relatively unchanged. High-yield borrowing that occurs against the backdrop of rising Treasury bond yields may be increasingly geared towards leveraged lending, as investors show a greater preference for floating rate debt that interest payments will increase with any future increase in short-term benchmark interest. rates.”
Leverage loans generally attract investors looking to generate income in a rising interest rate environment because of their variable rate component. However, central banks and agencies like the International Monetary Fund have warned that credit quality is declining.
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