Why Senior Loans Now?
Senior loan’s unique combination of appealing characteristics may position it as an enticing core holding in any environment.
- Duration Rally: Has it Come… and Gone for HY & IG Bond
2023’s year end interest rate rally drove outside returns for long duration. Roughly half of high yield’s recent run up can be attributed to duration. Year end levels for longer duration fixed income are factoring in 150bps of rate cuts in 2024. For long duration, the rally may have come and gone. The floating rate feature of loans results in the segment not being affected by changes in interest rates2. - Attractive Valuations: Both Absolute and on a Relative Basis vs HY
Senior loans spreads and yields remain attractive on a historical basis. Currently senior loan spreads3 are 528 bps, 73 bps above their 455 bps long term average. Additionally, high yield’s spread to worst has tightened to 3.63% and currently sits 129 bps below their 4.92% long term average4. On a relative basis, loans are 165 bps cheaper vs high yield on a spread basis4. - 2024 Outlook: Policy Makers are Expected to Pivot, but Rates Should Remain Elevated
We believe the broader loans segment is attractively valued and may fair well during 20245. The loan market coupon is currently 9.36%1, a function of nominal loan spreads at 3.98%1 and CME Term SOFR at 5.38%6. The forward SOFR curve currently implies an average 3-month SOFR rate of approximately 4.5% over the course of 2024.7 This reflects the broadly adopted market view that the US Federal Reserve (Fed) will pivot to easing interest rates in 1H 2024, but will unwind prior rate hikes cautiously. Despite the expectation of a gradual decline in rates, loan coupons remain near record highs8.
BKLN: Industry Leading Efficient Access to Senior Loans
Invesco Senior Loan ETF (BKLN), launched in 2011, was the world’s first senior loan ETF. BKLN has become known across ETFs for its liquid9, efficient and transparent10 access to the leveraged loans market. BKLN provides market cap exposure to the 100 largest and most liquid loan facilities in the leveraged loan market. It tracks the Morningstar LSTA US Leveraged Loan 100 Index, which includes the 100 largest and most liquid senior secured loans within the broader universe.
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1 Credit Suisse Leveraged Loan Index as of December 31, 2023
2 Source: Credit Suisse; Barclays; Bloomberg as of December 31, 2023.
3 three year discount margins.
4 Credit Suisse Leveraged Loan Index & Credit Suisse High Yield Index as of December 31, 2023. Long term averages based on data from January 31, 1992 to December 31, 2023.
5 Source: Invesco Senior Secured Management. There is no guarantee that the forecast will be realized. Forecast is based on coupon plus wider nominal spreads minus base rate declines minus price erosion.
6 Bloomberg December 4, 2023
7 Bloomberg January 4, 2024.
8 Source: PitchBook Data, Inc as of December 31, 2023.
9 The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.
10 Most ETFs disclose their portfolio holdings daily.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
Before investing, investors should carefully read the prospectus and consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund, investors should ask their financial professionals for a prospectus or download one at invesco.com.
