Bet on BKLN as leveraged loan issuance soars

The Invesco Senior Loan ETF (NYSEArca: BKLN) is nearly 2% higher year-to-date, and income investors are flocking to the original leveraged loan exchange-traded fund – signs that the search for income and returns is driving the market players beyond basic bond assets.

BKLN, which tracks the S & P / LSTA US Leveraged Loan 100 Index and returns 3.24%, is showing steady amid a wave of new bank loan issuance and as investors seek fixed income assets that can be useful for fighting inflation. Due to the fixed rate component found with BKLN components, the ETF can potentially be a better fighter against inflation than a traditional high yield corporate bond fund.

“The rally in junk debt marks a sign of fading investor concerns over the recent surge in inflation, which is eroding the purchasing power of fixed bond payments and may lead the Federal Reserve to raise interest rates “, reports Sebastian Pellejero for The Wall Street Journal.

Bank loan issuance typically increases as corporate profits do the same, indicating that companies have confidence in their own prospects and that of the economy in general. While economic growth is expected to slow in the third and fourth quarters from the breakneck pace set in the first half, economists see the world’s largest economy registering annual GDP growth of around 6% this year.

“Analysts and investors expect bond and loan sales to hit annual records. With low rates, companies are taking advantage of investor demand to refinance higher-cost debt, lowering their interest charges and pushing back repayments, ”according to the Newspaper.

BKLN components are often referred to as senior loans because the debt is higher in the corporate hierarchy than standard junk bonds, meaning senior loan holders have priority in the event of default or bankruptcy. As such, holdings of BKLN generally have lower yields than standard junk bonds, and credit risk is generally lower with this asset class. 91% of BKLN’s 144 holdings are rated BBB, BB or B.

Almost all of BKLN’s holdings have maturities of one to five or five to 10 years. In addition, leveraged loans dominate US government debt and investment grade corporate bonds, further enhancing the attractiveness of BKLN.

“Leverage loans, whose interest rates rise and fall with their benchmark, returned 4.2%. The two beat the total return by 0.05% for quality corporate bonds and minus 1.4% for Treasuries, ”according to the Newspaper.

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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.