The US Federal Reserve’s Federal Open Market Committee held the federal funds rate steady at its meeting last week, signaling a more neutral policy stance than markets had anticipated earlier this year. The bank loan market will likely continue to benefit from an elevated rate environment, due to the floating-rate nature of the asset class, as the coupons of loans rise and fall with interest rates, according to new data and insight from leading global index provider Morningstar Indexes.
The Morningstar LSTA US Leveraged Loan Index, composed of senior, broadly syndicated loans that are priced daily , notched a positive return in March and rose 1.3% in April, which helped the index recover after suffering losses in January and February. The index has risen 0.8% for the year through April month-end and provided a yield to maturity of 8.1%, reflecting the income component of floating-rate loans in the current environment. By comparison, the Morningstar US High-Yield Bond Index has a yield to maturity of 7.5% and has a higher percentage of riskier CCC rated credits.
Elizabeth Templeton, Fixed Income & Multi-Asset Senior Product Manager, Morningstar Indexes:
“Additional data suggests some stabilization within the leveraged loan market in April. The default rate declined from March, and while certain sectors such as software continue to face challenges, conditions appear to be moderating relative to February and March. The interest rate backdrop remains supportive for bank loans due to their floating-rate nature.”
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