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Leveraged-Loan Returns to Trail Bonds in 2011, Barclays Says

Sept. 13 (Bloomberg) -- Leveraged-loan returns will trail those of bonds this year after the Federal Reserve indicated it will keep interest rates near zero for another two years, according to analysts at Barclays Capital.

Loans lag behind high-yield bonds on a yield-to-worst and current yield basis, analysts led by Brad Rogoff wrote in a report today. Investors should consider swapping out of loans into comparable secured bonds, the analysts wrote.

The Federal Open Market Committee pledged in its Aug. 9 statement to keep its key interest rate at a record low at least through mid-2013 in an attempt to boost the stalled economic recovery. The benchmark interest rate has been at zero to 0.25 percent since December 2008. The yield on floating-rate instruments, such as leveraged loans, increase as rates rise.

“The Fed is on hold until the middle of 2013 so the return from carry will be subdued on loans, especially the ones without floors,” Gautam Kakodkar, an analyst at Barclays, said today in a telephone interview. “High-yield bonds have a much higher yield-to-worst and current yield.”

Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s. Loans are typically repaid first in a bankruptcy before bonds.

The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans has lost 2.7 percent this year. It declined 4.9 percent in August, the biggest monthly decline since November 2008.

U.S. high-yield bonds have gained 1.35 percent this year, according to Bank of America Merrill Lynch index data. The debt lost 4 percent in August.

To contact the reporter on this story: Richard Bravo in New York at rbravo5@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net

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