It’s a great time to be investing in bonds. They’re paying much higher yields than they have in a long time. For example, the yield on the 10-year Treasury note rose to 4.34% in mid-August, its highest level since November 2007. Yields could remain elevated for a while, too, as it looks like the Federal Reserve will keep interest rates high for some time.
While the credit cycle is turning down, it’s still early days. That’s an idea that Torsten Sløk, chief economist at Apollo Global Management, finds worrisome, rather than reassuring. In other words, things could get a lot worse from here for credit markets. Sløk titled one recent note to investors, “A default cycle has started and investors aren’t paying attention.”
Investment strategists who think the economy will head south next year routinely recommend that investors avoid leveraged loans. Gene Goldman, chief investment officer at Cetera Investment Management, says he doesn’t like the high-yield bond sector but still likes it better than leveraged loans. Still, there are some early signs of investor concern about loan quality. Business development companies, publicly traded companies that hold business loans, marked down the value of loans in the portfolios in the second quarter to 96% of cost, according to equity research from Oppenheimer.