Senior Loan ETFs like SRLNs are starting to recover
Treasury yields are skyrocketing at an alarming rate, but this does not hurt the issuance of leveraged loans, indicating that SPDR Blackstone / GSO Senior Loan ETF (NYSEArca: SRLN) is one of the fixed income exchange traded funds that investors can consider for the short term.
SRLN invests in senior loans made to companies operating in North America and outside of North America. The Portfolio may invest in senior loans through loans directly through the primary or secondary market or through participation in senior loans, which are contractual relationships with an existing lender in a loan facility where the loan portfolio purchases the loan. right to receive payments of principal and interest.
Since rates are typically reset quarterly, senior loans typically have a short term – a measure of a bond fund’s sensitivity to changes in interest rates. The variable rate component also offers investors an alternative method of obtaining returns while mitigating interest rate risk. Therefore, bank loans are seen as an attractive substitute for traditional corporate debt in a rising interest rate environment.
SRLN: right to a price increase?
“In terms of year-to-year changes in three-month moving averages, the 10-year Treasury yield shows an inverse correlation of -0.3 with investment grade bond issuance, a correlation zero with high yield bond issuance and a positive correlation of 0.41 with leveraged loan issuance, “according to Moody’s Investors Service. “On the other hand, as yields on Treasury bills rise, IG corporate bond offerings tend to fall, HY bond issuance does not move back and forth, while IG corporate bond issuance does not move back and forth. leverage increase. ”
Senior loans from the SRLN portfolio are paid first. A higher payment priority helps liquidity in that the defaulting borrower has to sell assets in order to repay their creditors – in this case senior loans in the SRLN portfolio are given higher priority – a viable option, especially in case of market downturn.
“In general, an upward trend in Treasury bond yields has been the result of an improved outlook for business activity and corporate earnings,” adds Moody’s. “In addition, HY corporate bond default rates tend to decline amid rising Treasury bill yields. For HY bond issuers, improved credit quality may offset rising benchmark bond yields and, therefore, leave HY bond offerings relatively unchanged. High-yield borrowing that occurs against the backdrop of rising Treasury bill yields may be increasingly geared towards leveraged lending, with investors showing a stronger preference for floating-rate borrowings with higher payments. interest will increase with any future increase in the short-term benchmark interest. rates.”
Leverage loans generally attract investors looking to generate income in a rising interest rate environment because of their variable rate component. However, central banks and agencies like the International Monetary Fund have warned that credit quality is declining.
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