- “We expect the current year to look a lot like the one just passed"
- ING IM notes that potential price upside is, by definition, limited, but remains positive
Senior Bank Loans set to benefit from hunt for yield in 2014. Dan Norman, Group Head Senior Bank Loans’ team at ING IM said: “We expect the current year to look a lot like the one just passed. Market technical in terms of demand relative to new issue supply should remain strong given the natural desire on the part of both institutional and retail investors, for floating rate assets to balance out the rate risk in their portfolios. Moreover, unless economic conditions take an unexpected and material turn for the worse, concerns over a rogue spike in default activity should remain on the back burner”.
ING IM notes that, given the average Index bid is close to par with most good loan assets at or slightly above, potential price upside is, by definition, limited. As for credit spreads, the investment manager recognises that they could tighten a little more from here, but it remains hopeful that most of the activity has taken place in terms of how it impacts the average Index and portfolio yield.
Dan Norman continues: “In sum, we fully expect the global hunt for yield to continue, and the loan asset class is well positioned to deliver on that thesis. If 2013 was best categorized as a “coupon plus a little” year, then 2014 is likely to be one in which investors should expect, realistically, the coupon. As such, our total return expectation for 2014 falls within the 4%-5% band.”
ING IM continues to find this return rate attractive on both an absolute and relative basis, especially when factoring in the outlook for longer rates and the likely value destruction in duration-rich investments. Furthermore the team believes this is also attractive considering the moves towards a lift in short-term rates, an environment in which the floating rate loan asset class has historically risen to the top of the return rankings.