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Surprises from the First Half of 2022: A Rare Macro and Geopolitical Period for the Bank Loan Market

The bank loan market entered 2022 positioned to shine. After a decade of low interest rates, investors were anticipating rates would rise to some extent. After flows only trickled into the mutual fund segment of the loan market through 2021, they took off in January 2022. That trend persisted into early May, albeit at a reduced pace due to geopolitical concerns.

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Exceptional times

Two notable themes emerged in May—investors bargain hunting and having concerns about credit. This sentiment weighed on the bank loan market. Since prices in the loan market had held up so well compared to many other asset classes, investors began to sell their loans and redeploy the proceeds into other categories they perceived as cheaper. This repriced the bank loan market lower, leaving some loan investors who were forced to sell to accept lower prices. The situation was exacerbated by those who forecasted a recession, which caused some loan prices to decline further. Our portfolio management team, with experience dating back to the late 1980s, cannot recall a time when rising rates transitioned so quickly to recession fears.

Our team has been focused on several reviews of our loan portfolios as we address these themes. We’ve looked for loans with more sensitivity to inflation, particularly consumer-facing credits. We identified loans that might be more sensitive to CLO trading behavior, particularly for loans at risk of downgrades. While our macro team isn’t forecasting high odds of a recession, we’ve used this time to look at our loan holdings as if they were, and in our view acted appropriately.

The combination of macroeconomic and geopolitical events we’ve witnessed during the past six months is unlike any prior period in the bank loan market’s history. It’s impossible to say with any certainty that we know what will happen next. However, due to the loan market’s floating-rate feature, higher coupon income is likely for the rest of 2022. This inherent characteristic of the loan market would suggest there may be value for investors in multiple scenarios versus other fixed income assets.

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Market conditions are extremely fluid and change frequently.

This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. This information is subject to change at any time without notice. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

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About the Authors

Loomis Sayles analysts are career professionals who offer deep knowledge and experience in a diversity of global asset classes and market sectors. These dedicated experts provide the insight essential to supporting our portfolio management teams across a wide range of investment strategies.

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