2019 Outlook: US Senior Loans

2018 review and 2019 outlook

Dec 20, 2018 | Scott Baskind

After a strong year of relative outperformance, in our view senior secured loans enter 2019 again poised to deliver steady returns.1 Loans’ short duration served investors well during 2018 as climbing short term interest rates bolstered loans’ floating coupons, contributing to price stability in contrast to the volatility in fixed rate assets.

 

More importantly, the defensive positioning of loans within issuers’ capital structures underpinned price stability during the bouts of risk aversion which punctuated the year. We believe these defining features of the asset class can continue to benefit investors amid rising rates and intermittent volatility stemming from concerns over trade, politics, and economic cycle progression. Moving into 2019, continued economic expansion, broad-based earnings growth, and healthy borrower balance sheets all establish a supportive fundamental credit backdrop for the loan asset class.

 

While we expect the current economic cycle will further elongate in 2019, we recognize that market volatility may remain elevated at the later stages of the cycle, especially with monetary tightening underway and ongoing trade tensions. In this environment, the defensiveness that senior secured loans offer may insulate investors from volatility, a dynamic that enabled loans to decouple from riskier assets over the past year.

1 There is no guarantee these views will come to pass.

 

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