Rely on BKLN as leveraged loan issuance increases sharply
the Invesco Senior Loan ETF (NYSEArca: BKLN) is up nearly 2% year-to-date and income investors are flocking to the original exchange-traded leveraged loan fund – a sign that the quest for income and yield is taking market participants beyond simple bond investments.
BKLN, which tracks the S&P / LSTA US Leveraged Loan 100 Index and returns 3.24%, is proving stable amid a spate of new bank loans and as investors look for fixed income assets that can be useful in fighting inflation. Because of the fixed income component of the BKLN components, the ETF can potentially be a better inflation fighter than a traditional high yield corporate bond fund.
“The rally in junk debt is a sign that investor worries are easing over the recent surge in inflation, which may undermine the purchasing power of the fixed-rate bonds and lead the Federal Reserve to hike rates,” says Sebastian Pellejero for The Wall Street Journal.
Bank lending tends to increase with corporate profits, suggesting that companies have confidence in their own prospects and those of the wider economy. While economic growth is expected to slow in the third and fourth quarters from the rapid pace of the first half of the year, economists predict that the world’s largest economy will see annual GDP growth of around 6% this year.
“Analysts and investors expect bond and loan sales to break annual records. When interest rates are low, companies take advantage of investor demand to refinance debt capital at higher costs, lower their interest costs and postpone repayment, ”said the diary.
BKLN components are often referred to as senior loans because debt ranks higher in the corporate hierarchy than standard junk bonds, meaning that senior borrowers are prioritized in the event of default or bankruptcy. As a result, BKLN holdings tend to have lower yields than standard junk bonds, and the credit risk is typically lower with this asset class. 91% of the 144 BKLN holdings are rated BBB, BB or B.
Almost all of the BKLN’s holdings have terms of one to five or five to ten years. In addition, leveraged loans outperform US Treasuries and investment grade corporate bonds, adding to the appeal of BKLN.
“Leveraged loans that have rates rising and falling with their benchmark have returned 4.2%. Both outperformed the total return of 0.05% for investment grade corporate bonds and minus 1.4% for government bonds, ”he said Diary.
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