29 April 2021

Fixed Income Snapshot: The Case for Leveraged Loans and High Yield Bonds When Rates Are Rising

Authors:

John Yovanovic, CFA

Portfolio Manager, Co-Head of Leveraged Finance

Leveraged loans and high yield bonds have historically performed well when long-term rates move higher. As the chart shows, returns for both asset classes have been negatively correlated with five- and 10-year Treasuries over the past 15 years. And while leveraged loans are an obvious choice when rates are rising given their short-duration, floating-rate structure, high yield bonds are also compelling: the same factors driving rate increases, including a brightening economic outlook and strong credit fundamentals, stand to benefit leveraged debt markets and improve the risk profiles of underlying companies – and high yield has been a strong performer during recent episodes of stock market volatility and past periods of rising rates.

Bottom line? Investors may benefit from looking below investment grade for fixed income alpha and a hedge against rising rates.

High Yield Bonds and Leveraged Loans Are Negatively Correlated With Treasuries – Offering a Potential Hedge Against Rising Rates

Fixed income asset class correlation with 5- and 10-year Treasuries (last 15 years ending 31 December 2020)

fixed-income-snapshot-the-case-for-leveraged-loans-and-high-yield-bonds-chart-1

Source: JP Morgan, S&P/LCD as of 31 December 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any views represent the opinion of the investment manager and are subject to change. MBS is represented by the JP Morgan MBS Bond Index, Aggregate is represented by the Bloomberg Barclays US Aggregate Bond Index, Investment Grade is represented by the JP Morgan US Liquid Index (JULI High-Grade Index), High Yield is represented by the JP Morgan US High Yield Index, and Leveraged Loans is represented by the JP Morgan Leveraged Loan Index.

For more information on how investors may benefit from allocations to high yield bonds and leveraged loans during rising-rate periods, see Seeking High-Yield Alpha at a Market Turning Point and Amid Rising Rates and Inflation Fears, Leveraged Loans Shine.

Disclosure

Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.