The CBOE Volatility Index has experienced a sustained rise in 2018
March 30, 2018 | 2 minute read
One quarter into 2018, investors have experienced a decidedly different investment environment than in 2017, which generally provided investors with strong market returns amid historically low levels of volatility.
This year, volatility has spiked on several occasions, driven higher first by the prospect of the U.S. Federal Reserve raising interest rates at a faster pace than largely anticipated and, more recently, by increasing tensions between the U.S. and some of its largest trading partners. As a result, the CBOE Volatility Index (VIX) is averaging approximately 17.3 in 2018 versus just 11.1 throughout all of 2017.1
We noted earlier this year that environments characterized by above-trend economic growth and low unemployment may be subject to sudden spikes in volatility, which is exactly what we are witnessing this year.
Within this environment, many asset classes have generated negative year-to-date returns. U.S. stocks have returned approximately -0.8% in 2018, while investment grade and high yield corporate bonds have returned -2.2% and -0.9%, respectively.2,3,4
In contrast, senior secured loans have drawn investor interest due to their floating rate coupon as investors have increasingly focused on rising interest rates. Senior secured loans have seen inflows 9 of the past 10 weeks and generated positive total returns of approximately 1.6% year to date.5
Although senior secured loans have been relatively insulated from the market declines this year, 2018 has served as a reminder that volatility can emerge very quickly and without notice. We believe that the conditions remain in place for further volatility this year and that investors may be well served in preparing their portfolios accordingly.