Bond and loan performance during periods of rising rates
Investment grade bonds versus high yield bonds and senior secured loans
February 23, 2018 | 1 minute read
Interest rate movements have been one source of volatility within both equity and fixed income markets recently. With Wednesday’s release of the minutes from January’s Federal Reserve meeting, this week was no exception. The yield on the 10-year U.S. Treasury note rose approximately 6 basis points on Wednesday and reached a new four-year high, before settling later in the week.1
The move was largely a response to the FOMC’s acknowledgment that recent economic conditions may warrant a “gradual upward trajectory of the federal funds rate.”2 However, this week’s move was just a continuation of the trend that has prevailed in 2018 and, more generally, since interest rates’ recent low point in September 2017.1
While rising rates may often be considered anathema to fixed income investors, the chart tells a more complete story. Specifically, high yield bonds and senior secured loans, which typically feature lower durations than the investment grade fixed income market, have posted solid returns during periods of rising interest rates.3
High yield bonds and senior secured loans generated competitive returns in each of five periods sampled since 1990 when interest rates experienced short-term spikes that averaged approximately 1.4%.1,17 Senior secured loans’ and high yield bonds’ average total returns during those five periods were 8.4% and 6.8%, respectively, compared to an average total return of -0.8% for investment grade bonds.1,3
Private credit has increasingly become the preferred source of financing for PE sponsors, with direct lending volume jumping 60% over last year’s level.
