Look For Opportunities In The High Yield Bank Loan Market

After an unprecedented decline in the first quarter of 2008, the bank loan sector rallied in the second quarter. Supply pressures are easing as the new issue backlog continues to shrink. On the demand side we are seeing renewed appetite for bank loans, especially from non-traditional buyers, faced with widening spreads, low treasury yields, and continuing volatility in other asset classes. Historically bank loan prices have moved in a very narrow band. Since bank loans are callable at par at any time, unlike high yield bonds, prices rarely exceed 101 on the upside. And the downside is limited due to the senior position of loans in the capital structure. The accompanying chart showing average loan pricing from 1997 to 2008, illustrates this point (see Figure 1).

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