Current market yields continue providing an attractive entry point across sectors in context with their historic downside risk, calculated as standard deviation of negative monthly returns over the last 10 years. This includes particularly adverse events, such as March 2020 market selloff (COVID pandemic start) and broad market repricing during one of the steepest rate hikes in history.
On this yield-over-risk basis, senior syndicated loans stand out, as their yield of 10% is more than eight times the negative return deviation exhibited historically over the 10-year horizon. One of the reasons for this favorable result, in contrast to high yield bonds for example, is that unlike fixed coupon bonds, floating-rate loans have been benefiting from rising risk-free rates, with growing interest income contributing to the sector’s strong performance during 2023. Looking ahead, to maximize the attractive yields on both senior loans and HY bonds, the investors should focus on active credit risk management with robust underwriting to protect invested capital from default losses.