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Floating Rate Loans: Attractive Income Potential in an Expensive Market
Monday 23 December 2024
Investment Talks
Floating Rate Loans: Attractive Income Potential in an Expensive Market
December 2024 | Corporate debt spreads have tightened to near-record levels as the US economy has continued to expand and the Fed has begun to decrease its short-term interest rate target. We believe the improving credit health of the loan universe, the fact that loan coupons are priced off the front end of the still-inverted curve, and the strong possibility that the Fed will be unable to cut rates quickly due to sticky inflation, support the inclusion of loans in income-oriented portfolios. Additionally, considering the likely continuing stickiness of core services inflation, we believe floating rate assets such as loans are currently an attractive option to add diversification to investors’ fixed income portfolios, which are generally weighted in favor of fixed-rate instruments. In effect, we consider loan allocations to represent hedges against continuing high inflation.
01 | Spreads have tightened due to investors’ optimism regarding economic growth and issuers’ ability to repay debt. While loan spreads currently are tight, the spreads are relatively wider than High Yield and Investment Grade spreads.
02 | The credit quality of the loan universe may be improving, which may reduce credit costs over time.
03 | Loan yields may benefit if the US Federal Reserve cuts rates slowly, which we believe is likely as inflation is proving to be sticky.
Important Information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management as of December 19, 2024. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product or service. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not indicative of future results. Amundi US is the US business of Amundi Asset Management.
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