Loans are yielding about 6 percent, while the rate paid on junk bonds has declined to 5.9 percent, according to JPMorgan Chase & Co. Investors who previously accepted lower yields for greater protection “no longer have to trade these benefits,” Hart said in a report yesterday.
Leveraged loans are attractive because they have low volatility, less interest-rate risk and offer more protection as they occupy the highest position in a company’s capital structure, Hart wrote in the report. Investors poured $690 million into loan funds this week, according to Bank of America Corp, as junk-bond yields may drop to record lows.
“With the average loan offering a yield to maturity of approximately 5.5 percent, we think investors are being well compensated for the low level of risk in credit today,” Hart wrote in the report.
Hart, who runs the loan team in the leveraged finance group at the world’s biggest money manager, said in an August 2011 interview on Bloomberg Television that loans provided value even as prices of the debt dropped by 5.8 percent that month.
Loan prices climbed to 97.74 cents yesterday, the highest since July 2007, according to the Standard & Poor’s/LSTA Leveraged Loan 100 Index. The debt returned 10.5 percent last year.
The floating-rate aspect of loans protect investors from losing value in a rising interest rate environment because the total coupon on the debt increases. The Federal Reserve pledged to hold its target rate near zero through mid-2015. Today, the three-month London interbank offered rate was set at 0.3 percent, the lowest since August 2011.
Rising interest rates could lead to “significant valuation losses” for fixed-income investors as U.S. corporate bond yields decline, Fitch Ratings wrote in a Dec. 19 report.
Leveraged loans are a type of high-yield debt ranked less than Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s.
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