Loans or Bonds?

There may be a favorable relative-value advantage for floating rate loans over high-yield bonds in the near term.


Relative value currently favors floating-rate loans over high-yield bonds.

Strong outperformance has brought high-yield bond yields below floating-rate loans. Since 2010, high-yield bonds have averaged a yield nearly 1% higher than floating-rate loans, given their lower position in the capital structure and greater downside risk. However, high-yield bond yields are now 1.1% below floating rate loans. With yields now favoring floating-rate loans and with current default rates of 1.39%, investors can improve their position in the capital structure of a company, and may reduce downside risk and volatility by considering loans over bonds. Combined with limited duration risk for floating-rate loans, Pacific Funds portfolio managers believe this provides a favorable relative-value advantage for floating-rate loans over high-yield bonds in the near term.


Source: Bloomberg Barclays, Credit Suisse, S&P Global Market Intelligence, December 31, 2019.

Past performance does not guarantee future results.  

Navigating this Environment with Pacific Funds

Pacific Funds offers fixed-income funds that are carefully constructed using a combination of investment-grade corporate bonds, high-yield bonds, floating-rate loans, and short-term debt securities. The portfolio management team stays true to its strength as corporate income specialists by researching individual securities and investing across the credit spectrum. Pacific FundsSM Floating Rate Income and Pacific FundsSM Strategic Income have the flexibility to adapt to changing market conditions by adjusting its asset mix to better reflect the investment team’s views on market segments and the interest-rate environment.

Asset-class mix as of December 31, 2019.

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The Bloomberg Barclays U.S. Corporate High-Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market.

The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. senior secure credit (leveraged loan) market.

Effective yield is the yield of a bond, assuming the periodic interest payments or coupons received are reinvested.

Duration is often used to measure a bond’s or fund’s sensitivity to interest rates. The longer a fund’s duration, the more sensitive it is to interest-rate risk. The shorter a fund’s duration, the less sensitive it is to interest-rate risk

Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

Important Notes and Disclosures

All investing involves risks including the possible loss of the principal amount invested. There is no guarantee the Funds will achieve their investment goal. Corporate bonds are subject to issuer risk in that their value may decline for reasons directly related to the issuer of the security. Not all U.S. government securities are checked or guaranteed by the U.S. government, and different government securities are subject to varying degrees of credit risk. Mortgage-related and other asset-backed securities are subject to certain rules affecting the housing market or the market for the assets underlying such securities. The Funds are subject to liquidity risk (the risk that an investment may be difficult to purchase, value, and sell particularly during adverse market conditions, because there is a limited market for the investment, or there are restrictions on resale) and credit risk (the risk an issuer may be unable or unwilling to meet its financial obligations, risking default). High-yield/high-risk bonds (“junk bonds”) and floating-rate loans (usually rated below investment grade) have greater risk of default than higher-rated securities/higher-quality bonds that may have a lower yield. The Funds are also subject to foreign-markets risk.

All share classes may not be available at all firms, and not all investors may be eligible for all share classes. Please see the prospectus for additional information about availability.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

You should consider a fund's investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or the applicable summary prospectus contain this and other information about the fund and are available from your financial advisor. The
prospectus and/or summary prospectus should be read carefully before investing.

Pacific Funds are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA), and are available through licensed third parties. Pacific Funds refers to Pacific Funds Series Trust.

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