Loans or Bonds?

Relative value currently favors floating-rate loans over high-yield bonds

The combined effects of strong technicals, fiscal and monetary stimulus, and the search for yield have once again pushed high-yield bond yields below floating-rate loans. While high-yield bonds have historically provided a higher yield than floating-rate loans (due to their lower position in the capital structure and greater downside risk), investors can benefit at times from the risk-adjusted yield dislocation between the two non-investment-grade sectors.

As of December 31, 2020, high-yield bond yields are now 0.73% below floating-rate loans. Over the past ten years, high-yield bonds have averaged a yield of 0.31% above floating-rate loans. Thus, we believe a better relative value opportunity resides in moving up the capital structure and increasing yield by favoring loans over bonds.

On a risk-adjusted yield basis across fixed income, bank loans have offered the highest yield per unit of volatility over the past five years.

Additionally, from a price perspective, high-yield bonds trade at a 5% premium compared to their 10-year average.

As a diversifier relative to major asset classes, bank loans offer better diversification characteristics compared to high-yield bonds.