Investors on both sides of the Atlantic are increasingly alive to the bank loan opportunity. This is a market that is well developed in the US and coming of age in Europe. That is perhaps unsurprising when you consider that the characteristics of this asset class could almost have been designed with current market conditions in mind.
Of course, there are very big differences between the conditions applying in the US and in the Eurozone. In the former, monetary policy tightening is underway in an economy that is operating at nearly full employment. In the latter, the policy rate of the European Central Bank (ECB) is zero in a single-currency bloc in which parts are plagued by chronic unemployment.
But the beauty of bank loans is that their special characteristics make them a compelling investment opportunity in both sets of market conditions. Their variable-rate structure provides protection against rates rising, as they have been in the US. And the high ranking of loans in corporate insolvencies, due to their senior secured status, ought to deliver stronger recovery rates than unsecured high-yield bonds would, should an economic downswing trigger a rise in defaults.
For European investors seeking returns in a zero-interest rate environment, loans o er more attractive yields than those generally available on fixed rate assets in the region.
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