Chart Library
Historical Returns, Yields After the Fed Paused Interest-Rate Hikes
Federal Reserve’s interest-rate hiking cycle. However, long-duration fixed income is in a different place than the last time the central bank pumped the breaks. On top of that, bank loans—the asset class that has traditionally seen outflows once the Fed has stopped hiking rates—also looks different than the last time the Fed took a pause.
Long investment-grade corporate bonds are represented by Bloomberg Long US Corporate Index. Long high-yield corporate bonds are represented by the Bloomberg US High Yield Long Index. Long U.S. Treasury Bonds are represented by the Bloomberg US Treasury Long Index. Bank loans are represented by the Credit Suisse Leverage Loan Index.
Longer Duration, Smaller Yield so far in 2023
Over the past 12 months, longer-duration asset classes have seen $99.4 billion in net inflows vs. $22.8 billion in outflows from shorter-duration categories.1 To date, this move to duration—sparked largely by the potential ending of rate hikes by the Fed—has seen bank-loan funds outperform long government bond, intermediate core bond and intermediate government bond funds in the second half of 2022, all of 2022 and 2023 year-to-date.
Yields Across Corporate Credit Have Been Rising
With yields across corporate credit currently far higher than at the end of 2021, investors may now assess whether additional credit risk has been worth the extra pickup in yield.
How Have Bank Loans Performed in Down Years?
In 2022, investors had few places to hide amid one of the worst market years on record. But one fixed-income asset class performed far better than others: Bank loans.
Duration, Yield and Fed Expectations
Some investors have started to add duration to their fixed-income investments, expecting a Federal Reserve pause in interest-rate hikes. But given the current curve inversion across various areas of fixed income, investors have been giving up yield for the sake of adding duration. With the Fed still reiterating a data-dependent approach, investors may be caught off guard if the Fed continues to raise rates without a pause.
Is it Time to Revisit Bank Loans?
In 2022, investors had few places to hide amid one of the worst market years on record. But one fixed-income asset class performed far better than others: Bank loans.
Short-Term vs. Intermediate Core Bonds
Fixed-income investors in intermediate core bond funds gave back 105% and 71% of their 5-year and 10-year return, respectively, in 2022. Investors who added exposure to short-term bond funds fared better; the average short-term bond fund finished 2022 with a return of -5.22% vs. -13.32% for the average intermediate core bond fund. This was the greatest margin of outperformance for short-term bond funds over intermediate core bond funds since the inception of the Morningstar Short Term Bond Category.
