Floating-rate loans perform through market cycles

Floating-rate loans perform through market cycles

17 June 2024

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While many investors may view loans solely as protection during rising rate environments, the past year has shown that the asset class may offer compelling returns outside of a hiking cycle.

The chart below illustrates cumulative performance of loans and several other major asset classes, for the period beginning in December 2021, a few months before the US Federal Reserve's first interest rate hike in March 2022, through April 2024. It highlights that loans have outperformed equities, in both the hiking cycle and post-hiking cycle, while being a less volatile asset class. In addition, loans outperformed traditional fixed income, including investment grade and high yield corporates both during and after the US hiking cycle.

Cumulative performance of loans through the market cycle

Cumulative Performance of loans through the market cycle

Source: Loans represented by the Morningstar LSTA US Leveraged Loan Index; Equities represented by the S&P 500® Index; US high yield (US HY) represented by the ICE BofA US High Yield Constrained Index; Investment grade corporates (IG Corp) represented by the Bloomberg US Corporate Bond Index.

What this means for investors

Yields on loans should remain elevated above historical averages and their floating coupons help insulate investors from rate volatility. Additionally, loans are typically higher in a company’s capital structure relative to equities and fixed-rate bonds. Given these characteristics, loans may play an important part in an overall portfolio, regardless of market cycles.

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Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of April 2024, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

High yield securities (“junk bonds”) are subject to reduced creditworthiness of issuers, increased risk of default, and a more limited and less liquid secondary market. High yield securities may also be subject to greater price volatility and risk of loss of income and principal than higher-rated securities.

Fixed income securities can lose value, including the possible loss of principal. An issuer of a fixed income security may be unable to make interest payments and/or repay principal in a timely manner. The prices of bonds and other fixed income securities will increase as interest rates fall and decrease as interest rates rise. Fixed income securities with longer maturities or duration generally are more sensitive to interest rate changes.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

The Bloomberg US Corporate Bond Index is composed of US dollar-denominated, investment grade corporate bonds that are US Securities and Exchange Commission (SEC)-registered or 144A with registration rights, and issued by industrial, utility, and financial companies. All bonds in the index have at least one year to maturity.

The ICE BofA US High Yield Constrained Index tracks the performance of US dollar-denominated below high yield corporate debt publicly issued in the US domestic market, but caps individual issuer exposure at 2% of the benchmark. Qualifying securities must have, among other things, a below-investment-grade rating (based on an average of Moody’s, Standard & Poor’s, and Fitch), an investment grade issuing country (based on an average of Moody’s, Standard & Poor’s, and Fitch foreign currency long-term sovereign debt ratings), and maturities of one year or more.

The Morningstar LSTA US Leveraged Loan Index, formerly known as the S&P/LSTA Leveraged Loan Index, is designed to deliver comprehensive, precise coverage of the US leveraged loan market.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value and is often used to represent performance of the US stock market.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

All third-party marks cited are the property of their respective owners.