- Since SNLN and BKLN have relatively short trading histories, I used underlying index data rather than fund data for the analysis. This allows for more stable pricing and greater consistency of the data. While not perfect, this approach does identify what investors can expect from the fund’s strategy.
- Not to sound cliche, but past performance doesn’t indicate future results. Clearly, we have seen some unprecedented moves in rates and spreads in the past two years, which may not persist going forward. However, considering these are index-tracking vehicles with stable methodologies, the sensitivities to rates and spreads aren’t likely to change dramatically overnight.
- I used monthly returns for the index and monthly changes in yields and spreads to do the multiple regression analysis to limit some of the noise often present in fixed-income data due to pricing and strike time differences.
- Negative betas, while possibly confusing, make perfect sense, as they reflect the inverse relationship between rates and prices.
The analysis had some expected results and some surprises.
Investors in JNK and HYG carry significantly more exposure to interest-rate shocks than SNLN or BKLN.
However, I expected the senior loan funds to have exposure of close to zero to the medium-term interest rate changes, but the exposure was surprisingly high, with a beta in the 0.7 range.
One explanation may be the extraordinarily flat shape of the current yield curve in the short and medium term. Also, with an adjusted r-squared of roughly 0.8, there’s still a significant portion of returns unexplained by interest rates and spreads. This may be due to most senior loans being tied to the Libor. Still, to me this was an unexpected surprise.
The spreads explained the vast majority of the returns in all four cases—again, not terribly surprising considering the lack of movement in the short and intermediate part of the yield curve.
The lower betas for BKLN and SNLN, -2.9 and -3.1, respectively, compared with HYG’s and JNK’s -4.0 and -4.4 readings, were in many ways of greatest interest to me, as they signaled that the senior loans do indeed show lower sensitivity to moves in spreads.
Considering the spread compression we’ve seen in 2012 and the lack of upside that’s currently available from downward moves in interest rates, senior loans stand to continue to gain traction with ETF investors hungry for yield.
|Beta to 5-Year Constant
|Beta to Barclays High
Yield Index OAS
At the time the article was written, the author had no positions in the securities mentioned. Contact Gene Koyfman at [email protected]. Follow Gene on Twitter @GeneKoyfman.