U.S. Senior Loan Mid-Year Update and Outlook: Volatility Could Present Attractive Opportunities
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U.S. Senior Loan Mid-Year Update and Outlook: Volatility Could Present Attractive Opportunities

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Mohamed Basma

Mohamed Basma, CFA

Managing Director, Head of Leveraged Credit

Skyscrapers and traffic in city

High starting yields should continue to provide a buffer against potential turmoil, and episodic bouts of volatility should present attractive opportunities for active managers to add risk.

Executive summary

The leveraged loan market delivered favorable returns in the first half of the year, supported by a better than- expected first-quarter earnings season and supportive technicals due to strong investor demand via collateralized loan obligation (CLO) issuance. 

Key trends in 1H25 

  • Performance: Coupon carry fully offset the market value declines, leading to a positive year-to-date return for the asset class.
  • Ratings dispersion: Higher-rated loans fared better in 1H25, largely attributable to their outperformance during a period of sharp volatility in April.
  • Industry performance mixed: Across sectors, those affected by tariffs, waning consumer sentiment and slower global growth have largely been among the bottom performers. 

2H25 outlook 

Looking ahead, the leveraged loan market is well positioned to deliver attractive returns, with high starting yields providing a cushion against potential volatility. Key themes for 2H25 include: 

Technical dynamics: Demand for leveraged loans has been strong, driven by CLO issuance. 

Resilient fundamentals: In aggregate, credit fundamentals for loan issuers remain broadly stable, although pockets of weakness will continue to persist. 

Lingering macro uncertainty: Tariff and other macro-related headwinds will likely persist, which should favor more defensive sectors.

 

A note about risk 

Principal risks for senior loans: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Voya’s senior loan strategies invest primarily in below investment grade, floating rate senior loans (also known as “high yield” or “junk” instruments), which are subject to greater levels of liquidity, credit and other risks than are investment grade instruments. There is a limited secondary market for floating rate loans, which may limit a strategy’s ability to sell a loan in a timely fashion or at a favorable price. If a loan is illiquid, the value of the loan may be negatively impacted and the manager may not be able to sell the loan in order to meet redemption needs or other portfolio cash requirements. The value of loans in the portfolio could be negatively impacted by adverse economic or market conditions and by the failure of borrowers to repay principal or interest. A decrease in demand for loans may adversely affect the value of the portfolio’s investments, causing the portfolio’s net asset value to fall. Because of the limited market for floating rate senior loans, it may be difficult to value loans in the portfolio on a daily basis. The actual price the portfolio receives upon the sale of a loan could differ significantly from the value assigned to it in the portfolio. The portfolio may invest in foreign instruments, which may present increased market, liquidity, currency, interest rate, political, information and other risks. These risks may be greater in the case of emerging market loans. Although interest rates for floating rate senior loans typically reset periodically, changes in market interest rates may impact the valuation of loans in the portfolio. In the case of early prepayment of loans in the portfolio, the portfolio may realize proceeds from the repayment that are less than the valuation assigned to the loan by the portfolio. In the case of extensions of payment periods by borrowers on loans in the portfolio, the valuation of the loans may be reduced. The portfolio may also invest in other investment companies and will pay a proportional share of the expenses of the other investment company. 

Principal risks for high yield bonds: All investing involves risks of fluctuating prices and the uncertainties of rates and return and yield inherent in investing. High yield securities, or “junk bonds,” are rated lower than investment grade bonds because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. As interest rates rise, bond prices may fall, reducing the value of the portfolio’s share price. Debt securities with longer durations tend to be more sensitive to interest rate changes than debt securities with shorter durations. Other risks of the portfolio include, but are not limited to, credit risk, other investment companies risks, price volatility risk, the inability to sell securities and securities lending risks.

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Market Outlook Senior Loan
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