Is it time to leave leveraged loans?
The leveraged loans market has grown significantly in the past few years, but investors should be aware of the potential pitfalls of the asset class.
Leveraged loan prices have begun to decline, and the sector faces liquidity headwinds. This prompts the question of what investors in leveraged loans can do to protect themselves from the challenges the sector will face as quantitative tightening (QT) begins to take hold. Hurdles include valuations inflated by quantitative easing (QE), credit issues and substantial supply/demand imbalances. We think the solution is to diversify this exposure from corporate-focused credit risk to a consumer-focused asset class that has not been as distorted by capital flows driven by QE, namely securitized credit.