Invesco strategist Ashley Oerth believes bank loans may be a good asset for investors who think growth will continue and interest rates won’t tumble. VettaFi contributor Dan Mika reached out to her to find out more about how bank loans can fit into investors’ fixed-income strategies. Invesco’s lineup includes the $7 billion Invesco Senior Loan ETF (BKLN).
Dan Mika, VettaFi: Please explain the macroeconomic conditions that back up Invesco’s belief in bank loan exposure. How does the most recent data, which showed U.S. GDP growth beat expectations, play into your case?
Ashley Oerth, Invesco: Bank loans share characteristics of both cash and high yield bonds. With these factors in mind, data points that signal solid growth could benefit bank loans as a stronger economy minimizes credit risk events. The latest U.S. GDP report is a good signal of continued economic resilience.
Moreover, the Fed is carefully watching for signs of a slowing economy. Signs that growth continues to persevere may help reduce the amount of easing the Fed ultimately pursues, which should help keep rates higher for longer and therefore benefit all-in yields in the bank loans space.
VettaFi: You note that credit metrics among bank loans look strong despite the higher-rate environment and slowing corporate revenue. Has something fundamentally changed in the business or default cycles that makes bank loans less worrisome from a risk-profile perspective?
Oerth: This business cycle has been profoundly unique, starting with the COVID pandemic and characterized by shifting consumer behaviors, outsized fiscal and monetary support, and a reshaping of global supply chains and trade. Plus, shifts in industrial policy have meant that fiscal support has become more targeted.
These factors have made the business cycle difficult to assess as they are making the economy more resilient to higher rates while achieving a higher trend growth rate. Bank loans have reflected this as well, with balance sheets appearing healthier than we would have expected given higher rates. Bank loan issuers have also continued to maintain robust earnings growth, enabling them to absorb higher interest expense and sustain healthy interest coverage ratios.
VettaFi: What factors should investors and financial advisors consider when determining how bank loan exposure fits within a portfolio?
Oerth: Bank loans share characteristics of both cash and high yield credit, which allows the asset class to offer income diversification with near-zero duration. Since bank loans are senior in the capital structure, but issuers are typically of lower credit ratings, investment-grade investors seeking more yield can benefit from bank loans by providing an intermediate step-up in credit risk.
In our view, bank loans should perform well in periods where economic activity is strong or improving and where interest rates are rising or elevated. In today’s environment of resilient economic activity with high policy rates, we believe bank loans continue to be poised to perform well.
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