Out of Bonds, Into Loans

While the flow of capital into stocks is in the limelight, a noteworthy rotation is happening within credit markets.

This goes beyond the issue of pitifully low yields, which pushed investors to high-yield bonds, bringing down the rates on those securities.

Now the urgent question is the risk to all fixed-interest bonds when the Federal Reserve stops – or even slows down – its monumental purchases of debt. Buying bonds as the Fed gets closer to reversing monetary easing is like buying that Florida condo at peak price before the property crash.

But most investors do not want to put all their money into stocks. The advice is to move into debt that does not have a fixed interest but pays a floating rate that will adjust as rates rise. Thus the growing number of new credit funds that can invest in floating-rate corporate debt or make loans that are otherwise protected when the Fed turns around, in addition to conventional bond investments.

Financial advisers have sought managers with broad expertise to run loan portfolios. Among the managers in demand is GSO, Blackstone’s credit arm. For instance, FS Global engaged GSO as sub-advisor to a new credit fund that will invest in different types of debt and take advantage of event-driven and special situations. FS Global says it “seeks to capitalize on market uncertainty.”

With over $56 billion in assets, GSO is one of the largest alternative credit managers.

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Tags: Federal Reserve, FS Global, GSO, Monetary policy