The end of 2014 feels a lot like the end of 2013 in regard to fixed income market sentiment. As the Yogi Berra quote goes: “it’s déjà vu all over again”.
The yield of the S&P/BGCantor Current 10 Year U.S. Treasury Index reached a high of 3.03% on December 31st as investors debated the impact of the Fed’s eventual reduction in stimulus which now is commonly known as the “Taper Tantrum”. The current level of yield for the index is nowhere near 3% at its current level of 2.31%, though it has increased by 17 basis points from the year’s low of 2.13% (10/15/2014).
When looking ahead to 2015, again the Fed will play a big role in the direction of the fixed income markets. Investors are looking ahead to an expected rate increase. The question is how soon and how aggressively will the Fed act and to what impact will such action have on both short and long term investments.
In the near term the need for yield will continue and if healthy economic growth continues, the balance sheets of these speculative rated companies should remain intact. The S&P/LSTA U.S. Leveraged Loan 100 Index which currently yields 4.85% had an October positive returns of 0.61% and 0.36% for November which helped this index return 1.9% year-to-date.
Bank Loans are likely to be hurt less by higher market rates than their high yield fixed rate counterparts. The average floor on a loan is 1% so Libor would have to move up significantly from its current level of 0.24%, but once the floor is breeched, the instrument become more floating in nature moving up with rates.