Error!

X

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

X

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

X

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Financial Professionals

Forgot password

Forgot Your LordAbbett.com password?

If you are a registered user, but have forgotten your LordAbbett.com password, please enter your email address.
Once your email address is verified, we will send you an email with instructions on how to reset your password.

EMAIL ADDRESS
e.g. joe@firm.com

Financial Professionals

Forgot Password

Thank you.

An email has been sent to with instructions on resetting your password.

Financial Professionals

Reset Password

NEW PASSWORD
Your password must be a minimum of characters.
CONFIRM NEW PASSWORD

Financial Professionals

Reset Password

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

Financial Professional*

  • Gain access to exclusive LinkedIn Groups
  • Simplify your login
LOGIN WITH LinkedIn
LOGIN WITH LinkedIn

A verification Email Has Been Sent

Close

An email verification email has been sent to .
Follow the instructions to complete the email validation process.

I have not received my verification email

Check your SPAM mailbox and make sure that twelcome@lordabbett.com is allowed to send you mail.

I'm still having trouble

If you're still having trouble verifying your email address. feel free to contact us.

1-888-522-2388
clientservices@lordabbett.com


OK

We're sorry. We found no record of the email address you provided.

Close

Register For a LordAbbett.com Account
Using Your Email Address.

  • Registered Financial Advisors gain access to:
  • Our data mining tool, Insight & Intelligence
  • Best in-class practice management content
  • Educational events, videos and podcasts.
  • The Lord Abbett Review - Subscribe now!

Registered but Having Problems?

If you believe you are registered and are having problems verifying your email address, feel free to contact us.

1-888-522-2388 clientservices@lordabbett.com

Terms & Condition

X

These Terms of Use ("Terms of Use") are made between the undersigned user ("you") and Lord, Abbett & Co. ("we" or "us"). They become effective on the date that you electronically execute these Terms of Use ("Effective Date").

A. You are a successful financial consultant that markets securities, including the Lord Abbett Family of Funds;

B. We have developed the Lord Abbett Intelligence System (the "Intelligence System"), a state of the art information resource that we make available to a limited community of broker/dealers through the Internet at a secure Web site (the "LAIS Site"); and

C. We wish to provide access to the Intelligence System to you as an information tool responsive to the demands of your successful business pursuant to these Terms of Use. Accordingly, you and we, intending to be legally bound, hereby agree as follows:]

1. Overview. · Scope. These Terms of Use (which we may amend from time to time) govern your use of the Intelligence System. · Revisions; Changes. We may amend these Terms of Use at any time by posting amended Terms of Use ("Amended Terms of Use") on the LAIS Site. Any Amended Terms of Use will become effective immediately upon posting. Your use of the Intelligence System after any Amended Terms of Use become effective will be deemed to constitute your acceptance of those Amended Terms of Use.We may modify or discontinue the Intelligence System at any time, temporarily or permanently, with or without notice to you. Purpose of the Intelligence System. The Intelligence System is intended to be an information resource that you may use to contribute to your business research. The Intelligence System is for broker/dealer use only; it is not to be used with the public in oral, written or electronic form. The information on the Intelligence System and LAIS Site is for your information only and is neither the tax, legal or investment advice of Lord Abbett or its third-party sources nor their recommendation to purchase or sell any security.

2. Your Privileges. · Personal Use. Your use of the Intelligence System is a nontransferable privilege granted by us to you and that we may deny, suspend or revoke at any time, with or without cause or notice. · Access to and Use of the Intelligence System. The User ID and password (together, an "Access ID") issued by us to you (as subsequently changed by you from time to time) is for your exclusive access to and use of the Intelligence System. You will: (a) be responsible for the security and use of your Access ID, (b) not disclose your Access ID to anyone and (c) not permit anyone to use your Access ID. Any access or use of the Intelligence System through the use of your Access ID will be deemed to be your actions, for which you will be responsible. · Required Technology. You must provide, at your own cost and expense, the equipment and services necessary to access and use the Intelligence System. At any time, we may change the supporting technology and services necessary to use the Intelligence System. · Availability. We make no guarantee that you will be able to access the Intelligence System at any given time or that your access will be uninterrupted, error-free or free from unauthorized security breaches.

3. Rights in Data. Our use of information collected from you will be in accordance with our Privacy Policy posted on the LAIS Site. Our compliance with our Privacy Policy will survive any termination of these Terms of Use or of your use of the Intelligence System.

4. Your Conduct in the Use of the Intelligence System. You may access, search, view and store a personal copy of the information contained on the LAIS Site for your use as a broker/dealer. Any other use by you of the Intelligence System and the information contained on the LAIS Site these Terms of Use is strictly prohibited. Without limiting the preceding sentence, you will not: · Engage in or permit any reproduction, copying, translation, modification, adaptation, creation of derivative works from, distribution, transmission, transfer, republication, compilation or decompilation, reverse engineering, display, removal or deletion of the Intelligence System, any portion thereof, or any data, content or information provided by us or any of our third-party sources in any form, media or technology now existing or hereafter developed, that is not specifically authorized under these Terms of Use.

· Remove, obscure or alter any notice, disclaimer or other disclosure affixed to or contained within the Intelligence System, including any copyright notice, trademark and other proprietary rights notices and any legal notices regarding the data, content or information provided through the Intelligence System.

· Create a hyperlink to, frame or use framing techniques to enclose any information found anywhere on the LAIS Site without our express prior written consent.

· Impersonate any person, or falsely state or otherwise misrepresent his or her affiliation with any person in connection with any use of the Intelligence System.

· Breach or attempt to breach the security of the Intelligence System or any network, servers, data, or computers or other hardware relating to or used in connection with the Intelligence System; nor (b) use or distribute through the Intelligence System software or other tools or devices designed to interfere with or compromise the privacy, security or use of the Intelligence System by others or the operations or assets of any person.

· Violate any applicable law, including, without limitation, any state federal securities laws. 5. Your Representations and Warranties. You hereby represent and warrant to us, for our benefit, as of the time of these Terms of Use and for so long as you continue to use the Intelligence System, that (a) you are, and will continue to be, in compliance with these Terms of Use and any applicable laws and (b) you are authorized to provide to us the information we collect, as described in our Privacy Policy.

6. Disclaimer of Warranties.

· General Disclaimers.

THE INTELLIGENCE SYSTEM, THE LAIS SITE AND ALL DATA, INFORMATION AND CONTENT ON THE LAIS SITE ARE PROVIDED "AS IS" AND “AS AVAILABLE” AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND. WITHOUT LIMITING THE PRECEDING SENTENCE, LORD ABBETT, ITS AFFILIATES, AGENTS, THIRD-PARTY SUPPLIERS AND LICENSORS, AND THEIR RESPECTIVE EMPLOYEES, CONTRACTORS, DIRECTORS, OFFICERS AND SHAREHOLDERS (COLLECTIVELY, THE “LORD ABBETT GROUP”) EXPRESSLY DISCLAIM ALL WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND NONINFRINGEMENT. YOU EXPRESSLY AGREE THAT YOUR USE OF THE LAIS SITE, THE INTELLIGENCE SYSTEM, AND THE DATA, INFORMATION AND CONTENT PRESENTED THERE ARE AT YOUR SOLE RISK AND THAT THE LORD ABBETT GROUP WILL NOT BE RESPONSIBLE FOR ANY (A) ERRORS OR INACCURACIES IN THE DATA, CONTENT AND INFORMATION ON THE LAIS SITE AND THE INTELLIGENCE SYSTEM OR (B) ANY TERMINATION, SUSPENSION, INTERRUPTION OF SERVICES, OR DELAYS IN THE OPERATION OF THE LAIS SITE OR THE INTELLIGENCE SYSTEM.

· Disclaimer Regarding Investment Research.

THE INTELLIGENCE SYSTEM INCORPORATES DATA, CONTENT AND INFORMATION FROM VARIOUS SOURCES THAT WE BELIEVE TO BE ACCURATE AND RELIABLE. HOWEVER, THE LORD ABBETT GROUP MAKES NO CLAIMS, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY, TIMELINESS, COMPLETENESS OR TRUTHFULNESS OF SUCH DATA, CONTENT AND INFORMATION. YOU EXPRESSLY AGREE THAT YOU ARE RESPONSIBLE FOR INDEPENDENTLY VERIFYING YOUR INVESTMENT RESEARCH PRIOR TO FORMING YOUR INVESTMENT DECISIONS OR RENDERING INVESTMENT ADVICE. THE LORD ABBETT GROUP WILL NOT BE LIABLE FOR ANY INVESTMENT DECISION MADE BY YOU OR ANY OTHER PERSON BASED UPON THE DATA, CONTENT AND INFORMATION PROVIDED THROUGH THE INTELLIGENCE SYSTEM OR ON THE LAIS SITE.

· Survival.

THIS SECTION 6 SHALL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM..

7. Limitations on Liability.

NONE OF THE MEMBERS OF THE LORD ABBETT GROUP WILL BE LIABLE TO YOU OR ANY OTHER PERSON FOR ANY DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, SPECIAL OR EXEMPLARY DAMAGES (INCLUDING LOSS OF PROFITS, LOSS OF USE, TRANSACTION LOSSES, OPPORTUNITY COSTS, LOSS OF DATA, OR INTERRUPTION OF BUSINESS) RESULTING FROM, ARISING OUT OF OR IN ANY WAY RELATING TO THE INTELLIGENCE SYSTEM, THE LAIS SITE OR YOUR USE THEREOF, EVEN IF THE LORD ABBETT GROUP HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS SECTION 7 WILL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM.

8. Miscellaneous Provisions.

· Governing Law. This Agreement will governed by and construed in accordance with the laws of the State of New York, without giving effect to applicable conflicts of law principles.

THE UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT OR ANY VERSION THEREOF, ADOPTED BY ANY STATE, IN ANY FORM ("UCITA") WILL NOT APPLY TO THESE TERMS OF USE. TO THE EXTENT THAT UCITA IS APPLICABLE, THE PARTIES HEREBY AGREE TO OPT OUT OF THE APPLICABILITY OF UCITA PURSUANT TO THE OPT-OUT PROVISION(S) CONTAINED THEREIN.

The Intelligence System is not intended to be used by consumers, nor are the consumer protection laws of any jurisdiction intended to apply to the Intelligence System. You agree to initiate and maintain any action, suit or proceeding relating to these Terms of Use or arising out of the use of the Intelligence System exclusively in the courts, state and federal, located in or having jurisdiction over New York County, New York.

YOU HEREBY CONSENT TO THE PERSONAL JURISDICTION AND VENUE OF THE COURTS, STATE AND FEDERAL, LOCATED IN OR HAVING JURISDICTION OVER NEW YORK COUNTY, NEW YORK. YOU AGREE THAT YOU WILL NOT OBJECT TO A PROCEEDING BROUGHT IN YOUR LOCAL JURISDICTION TO ENFORCE AN ORDER OR JUDGMENT OBTAINED IN NEW YORK.

· Relationship of Parties. The parties to these Terms of Use are independent contractors and nothing in these Terms of Use will be construed as creating an employment relationship, joint venture, partnership, agency or fiduciary relationship between the parties.

· Notice. All notices provided under these Terms of Use will be in writing and will be deemed effective: (a) when delivered personally, (b) when received by electronic delivery, (c) one business day after deposit with a commercial overnight carrier specifying next day delivery, with written verification of receipt, or (d) three business days after having been sent by registered or certified mail, return receipt requested. We will only accept notices from you in English and by conventional mail addressed to: General Counsel Lord, Abbett & Co. 90 Hudson Street Jersey City, N.J. 07302-3973 We may give you notice by conventional mail or electronic mail addressed to the last mail or electronic mail address transmitted by you to us.

· Third-Party Beneficiaries. The members of the Lord Abbett Group are third-party beneficiaries of the rights and benefits provided to us under these Terms of Use. You understand and agree that any right or benefit available to us or any member of the Lord Abbett Group hereunder will also be deemed to accrue to the benefit of, and may be exercised directly by, any member of the Lord Abbett Group to the extent applicable.

· Survival. This Section 8 will survive any termination of these Terms of Use or your use of the Intelligence System. The undersigned hereby signs these Terms of Use. By electronically signing and clicking "Accept" below, these Terms of Use will be legally binding on me. To sign these Terms of Use, confirm your full name and enter your User ID and Password (as your electronic signature) in the fields indicated below and click the “I Accept” button.

 

Fixed-Income Insights

In this environment, floating-rate loans can provide attractive income with less volatility than high-yield bonds or equities.

In recent years, investors have looked to new solutions for their bond allocations in order to address the problems of today’s fixed-income environment. Traditional fixed-income strategies have been offering historically low yields, while presenting the potential for capital losses in the case of a rising interest-rate environment. One area that has garnered particular attention has been floating-rate loan funds. Floating-rate funds (also known as senior loan or bank loan funds) historically have offered a relatively attractive income stream, while presenting less interest-rate risk than traditional, fixed-rate bond strategies. 

This combination of attributes has led to strong demand for the asset class of late; in fact, according to Lipper, floating-rate mutual funds recorded an astounding streak of 95 consecutive weeks of inflows over the period of June 2012 through April 2014. In recent weeks however, fund flows have turned negative, and many press reports have questioned the benefits of the asset class. In this piece, we address some issues that have been raised, and suggest that an allocation to a floating-rate fund may still be appropriate for today’s environment, as one component of a diversified fixed-income portfolio.

Background
While floating-rate loan funds have gained in popularity, the asset class has more than two decades of history.  The Credit Suisse Leveraged Loan Index, one of the primary benchmarks for the asset class, dates back to 1992. While the Credit Suisse (CS) Leveraged Loan Index1 has grown in recent years, representing approximately $820 billion in market size (as of April 30, 2014), this is below its peak of $856 billion in assets reached in 2008. [All data from Credit Suisse.]

Similar to high-yield bonds, floating-rate loans represent another type of borrowing by below investment-grade companies. The key differences with high-yield bonds are:

  • Seniority—Bank loans are “senior” in a company’s capital structure, typically secured by assets; and in the case of a default or restructuring, loans have a prior claim on the company’s assets, ahead of bondholders.

  • Floating-rate coupon—Unlike fixed-rate bonds, loans have a floating-rate coupon, typically offering a yield spread above a short-term interest rate, such as a three-month LIBOR (London Interbank Offer Rate), which re-sets every 30 to 90 days. So, as short-term rates move higher, the coupon re-sets higher as well. While higher rates are a negative for fixed-rate bonds, loan investors can benefit from higher interest rates as they receive a higher income stream.

  • Call protection—Bond issues commonly have a period of call protection, whereby issuers cannot redeem their bonds prior to a stated first call date. Loans, on the other hand, offer companies the flexibility to pre-pay or refinance their loans early. Although loans often are issued with a seven-year final maturity, they often are assumed to have a three-year average life, due to early repayments.

Floating-rate loans offer several benefits to investors, including:

  • Income—Floating-rate funds tend to offer a higher yield than other low-duration strategies.

  • Less historical volatility—Over the short and long term, the CS Leveraged Loan Index has had 25–30% lower volatility than the CS High Yield Bond Index,2  according to Zephyr Style Advisor. The Loan Index also has experienced a lower default rate than the high-yield index, and in the case of default, a higher recovery rate than the high-yield index. 

  • Diversification—The CS Leveraged Loan index historically has had negative correlation with the Barclays U.S. Aggregate Bond Index (-0.03)3 and the Barclays U.S. Government Bond Index 4(-0.28), as well as low correlation to the S&P 500® Index5 (0.42), suggesting that adding a floating-rate fund to a portfolio can help increase overall portfolio diversification.  [Of course, diversification does not guarantee a profit or protect against loss in declining markets.]  

 

Table 1. Floating-Rate Loans Have Offered Less Volatility Than High Yield, and Low Correlation with Other Asset Classes 

Source: Zephyr Style Advisor.
Past performance is no guarantee of future results. For illustrative purposes only and does not represent any specific Lord Abbett mutual fund or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses and expenses, and are not available for direct investment.
Volatility is represented by standard deviation.

 

The Credit Suisse Leveraged Loan Index has had a history of delivering generally positive returns, with only one negative year out of 22 calendar years since its inception in 1992. But the main attribute that has attracted attention in recent years is the asset class’s performance during periods of rising interest rates. There have been several periods over the past two decades when the Federal Reserve has raised short-term rates, or when the yield on the 10-year Treasury bond has risen by more than 100 basis points (bps). In each instance, floating-rates loans have generated positive returns, and have outperformed longer-duration Treasury securities. [However, there is no guarantee that floating-rate loans will perform in a similar manner under similar conditions in the future.]

 

Table 2.  Loans Have Outperformed When the 10-Year Treasury Rose More Than 100 Basis Points.  

Source: Morningstar.
Past performance is no guarantee of future results. Performance during other time periods may have been different or negative. Other indexes may not have performed in the same manner under similar conditions. For illustrative purposes only and does not represent any specific Lord Abbett mutual fund or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses and expenses, and are not available for direct investment.
1 The Citigroup 10 Year Treasury Bond Index is a broad measure of the performance of the medium-term U.S. Treasury securities.
2 Barclays U.S. Aggregate Bond Index.
Credit Suisse Leveraged Loan Index.

 

Chart 1. Loans Have Outperformed When the Fed Funds Rate Has Risen. 

Source: Morningstar.
Past performance is no guarantee of future results. Performance during other time periods may have been different or negative. Other indexes may not have performed in the same manner under similar conditions. For illustrative purposes only and does not represent any specific Lord Abbett mutual fund or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses and expenses, and are not available for direct investment.
Floating-rate loans are represented by the Credit Suisse Leveraged Loan Index.
The 10-year Treasury is represented by the BofA Merrill Lynch 10-Year U.S. Treasury Yield Index.
*Three-year average annual returns.

 

A Change in Attitude
Although many investors have been preparing for a rising interest-rate environment in 2014, especially in light of the tapering of the asset purchase program conducted by the Fed, the opposite scenario has played out.  The yield on the 10-year Treasury bond has declined by more than 40 bps year to date, recently offering a 2.59% yield to maturity (as of May 7, 2014).  This has led to strong returns for most long-maturity bonds, illustrated by a 4.9% return on the 10-year bond (as represented by the Citigroup 10-Year Treasury Bond Index) and an 11.7% return on the 30-year Treasury bond (as represented by the BofA Merrill Lynch Current 30-Year U.S. Treasury Index6) for the year-to-date period through May 7. [All data sourced from Bloomberg.]

While the CS Loan Leveraged Index has generated a positive return of 1.8% over this period, the asset class has lagged the returns of high-yield bonds, or other longer-duration fixed-income securities. [Data sourced from Credit Suisse.] To the surprise of many, duration has helped fixed-income returns so far in 2014.

At the same time, there have been various objections raised regarding investing in bank loans, such as:

  • The market has already recovered from its credit crisis levels, leaving little room for price appreciation.
  • The floating-rate coupon is tied to short-term interest rates, which may stay low for some time, despite potential for higher long-term bond yields.
  • Most loans now have a LIBOR floor of approximately 1.00%, which will prevent their coupon from adjusting higher, until LIBOR increases by 75 bps or so from current levels.

These objections, combined with the strong performance of longer-duration assets, and reduced anxiety over higher interest rates, have led to modest outflows from the asset class in recent weeks. Despite these objections, we believe the floating-rate loans still deserve a place in many investors’ fixed-income portfolios.

A Case for Floating-Rate Loans Today
It is true that the market has recovered from the depths of the financial crisis (2008–09), when the average price in the CS Leveraged Loan Index hit $62.25 in December 2008. Now that the average price has recovered to $98.75, and many loans are trading at or near par, there is little room for further price appreciation. Still, with an average coupon and current yield of approximately 4.65% on the CS Leveraged Loan Index (as of April 30, 2014), the income alone would represent a relatively attractive return potential, when compared to the 2.6% yield to maturity on the current 10-year Treasury bond, or the 2.3% average yield to maturity on the Barclays U.S. Aggregate Bond Index, according to Bloomberg.

What about the objection that short-term interest rates are likely to stay low for some time? With the prevalence of LIBOR floors, most loans’ coupons will not begin to adjust higher until LIBOR increases to about 1.00%. Will investors be disappointed? Perhaps some will because they won’t be getting the immediate benefit of higher income. However, if rates were to rise by this amount, most investors should be very happy with the benefit of not having the interest-rate risk of longer-duration securities. While floating-rate loans with LIBOR floors might not see higher income from the first 75 basis-point move in rates, they will not suffer the price declines that longer-duration fixed-rate securities would experience.

Let’s, then, consider an example of hypothetical returns over the course of one year based on the yield and duration of the CS Leveraged Loan Index, the Barclay’s U.S. Aggregate Bond Index, and a 10-year U.S. Treasury bond. As of April 30, 2014, the average yield in the CS Leveraged Loan Index was approximately 4.65%, compared to a 2.3% and 2.6% yield to maturity, respectively, on the Barclays Aggregate and a 10-year Treasury bond. Assuming all else equal (that is, no changes in interest rates or credit spreads), the higher income from loans would lead to approximately 200 bps in higher total return over a one-year horizon.

What happens if all yields rise by 100 bps in a parallel manner over the course of a year? Assuming that the floating-rate loans all have LIBOR floors in place that would prevent the coupon from adjusting higher, the loans would not see an increase in income but instead would still generate a current income of 4.65%. (Most loans will experience higher coupon re-sets after a 75 basis-point move in LIBOR; but for this example, we assume loans receive no benefit from a 100 basis-point move.) What about the bond alternatives? The higher yields would lead to lower prices for the longer-duration bonds. This would lead to losses of 3.3% and 6.2%, respectively, for the Barclays Aggregate and a 10-year Treasury bond.

 

Table 3. Loans May Offer Higher Returns in a Flat or Rising Rate Environment

Source: CS Leveraged Loan Index, Barclays Capital U.S. Aggregate Index, and Citigroup 10-Year Treasury Bond Index, which is a broad measure of the performance of medium-term U.S. Treasury securities.
All data as of April 30, 2014.
This hypothetical example is for illustrative purposes only, and does not represent any specific Lord Abbett mutual fund or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
The forecasts and projections above are based on current market conditions, are subject to change without notice, and should not be considered a guarantee.

 

There certainly are a number of factors that would affect the outcome of this comparison of yield and duration across these asset classes. But this exercise should help illustrate that even without the benefit of increased income in the near term for floating-rate loans, the high current income and low interest-rate exposure present an attractive alternative within today’s fixed-income environment.

Since loans are a below investment-grade asset class, and clearly a different credit profile than the Barclays Aggregate Index, one should also compare an allocation to loans with high-yield bonds. While the floating-rate coupon would benefit loans in an environment of sharply higher rates, high-yield bonds would likely outperform loans in a stable rate environment, given their higher current yields. But in an economic downturn, loans would likely outperform high yield, given their senior position in the capital structure. As noted earlier, the Credit Suisse Leveraged Loan Index has had, historically, lower volatility, lower default rates, and, in the case of default, higher recovery rates than the Credit Suisse High Yield Bond Index        

Of course, if the economy were to suffer an unexpected downturn, leading to increased credit problems among corporate issuers, high-yield bonds and loans would both suffer, while government-related securities likely would experience price appreciation and, even, lower interest rates. But the economy appears to be headed for a period of continued positive, if not robust, economic growth. Our base-case scenario for the U.S. economy is that growth likely will accelerate moderately this year as the fiscal drag of last year’s sequestration subsides. Corporate credit fundamentals remain favorable, with companies benefiting from low interest rates, and we expect default rates to remain below longer-term norms, leading to a continued positive credit environment for high-yield bonds and floating-rate loans.

Conclusion
In this environment, floating-rate loans can provide attractive income without the duration risk of fixed-rate bonds, with less volatility than high-yield bonds or equities, and as a source of portfolio diversification, given the low or negative historical correlation of floating-rate loans with other major asset classes.

We would not suggest that loans be a replacement for a fixed-income portfolio. But an allocation to floating-rate loans, combined with allocations to short-duration bonds, intermediate high-quality, high-yield, and convertible securities, may provide investors with sources of income, while being positioned for multiple economic scenarios.

 

Table 4. Loan Index Characteristics 

Source: Credit Suisse.
Past performance is no guarantee of future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses and expenses, and are not available for direct investment.
The average price refers to the average of all the prices of the loans in the Credit Suisse Leveraged Loan Index. 

 

The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. dollar-denominated leveraged loan market. The CS Leveraged Loan Index is an unmanaged, trader-priced index that tracks leveraged loans. The CS Leveraged Loan Index, which includes reinvested dividends, has been taken from published sources.
The Credit Suisse High Yield Index is an unmanaged, trader-priced index constructed to mirror the characteristics of the high-yield market. The index includes issues rated BB and below by S&P or Moody’s, with par amounts greater than $75 million.
The Barclays U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.
The Barclays U.S. Government Bond Index is a market value-weighted index composed of all publicly issued, nonconvertible, domestic debt of the U.S. government or any agency thereof, quasi-federal corporations, or corporate debt guaranteed by the U.S. government. Flower bonds and pass-through issues are excluded. Total return consists of price appreciation/depreciation plus income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.
The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.
The BofA Merrill Lynch Current 30-Year US Treasury Index is a one-security index comprised of the most recently issued 30-year US Treasury bond. The index is rebalanced monthly. In order to qualify for inclusion, a 30-year bond must be auctioned on or before the third business day before the last business day of the month.

RELATED TOPICS

ABOUT THE AUTHOR

RELATED FUND
The Fund seeks to deliver a high level of current income by investing primarily in a variety of below investment grade loans.

RELATED BLOG

 

videoRead our blog for more of Stephen Hillebrecht's outlook for floating rate loans. Join the conversation.

RELATED CONTENT

[an error occurred while processing this directive]