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Bank-loan funds lacked investor appeal in 2019 and 2020 as interest rates fell. But economic recovery and the potential for rising short-term interest rates have put the category back in favor in 2021. Bank-loan mutual funds have received net inflows of more than $13 billion for the year to date through April 2021, which was almost a fourth of the category’s assets at the beginning of the year. Demand for high-yield bond funds has been milder this year despite the similarities of the two asset classes. While high-yield bonds have greater upside potential, bank loans defensive characteristics make them an attractive portfolio diversifier. Bank loans’ unique floating-rate feature, their hierarchy in the capital structure, and the loan market’s industry composition all make for an appealing relative value opportunity versus high-yield bonds.
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Economists and central bankers have warned about a spike in inflation over and over again since the 2008 global financial crisis, but inflation remained low and investors subsequently numbed to the warnings. Could this time be different? Maybe.
The average inflation rate shrank in each of the prior four decades. It clocked in at 7.4% in the 1970s but declined to a tiny 1.8% in the 2010s. Unprecedented fiscal stimulus didn t lead to meaningfully higher inflation following the 2008 financial crisis, and in 2012, the Federal Reserve established a 2.0% inflation target that it couldn t quite reach. Near-zero interest rates and supportive fiscal policies have, at various points in the preceding decade, led to dire predictions of runaway inflation, but it never happened. No matter the efforts of central banks, inflation remained stubbornly low.