Leveraged loans have been the asset class of choice this year, with fixed income investors drawn to the floating-rate nature of these securities in a rising rate environment. Investors have piled into the asset class since the beginning of 2021 at the expense of other segments of the market, including high yield bonds. High yield bonds are typically the first to show signs of deterioration in stressed credit markets and tend to be subject to more volatile trading patterns. Below the surface, however, the overall quality of the loan market has deteriorated relative to high yield and changes at the issuer level have impacted the perceived safety of the asset class. Investors who have flocked to loans may need to pause and consider that it could be the loan market — not high yield — that signals trouble on the horizon.
This newsletter provides background on leveraged loans and analyzes historical and recent performance and flows, shifts in quality, and seniority and covenants.
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