When to Buy BDCL?

I closely watch the yield spreads between BDCs and other investments including the ‘BofA Merrill Lynch US Corporate B Index’ (Corp B). Yield spreads are important to monitor as they can indicate when a basket of investments is overbought or oversold compared to other yield-related investments. However, general market yields can change at any time. Also, spreads change depending on perception of risk and these are only averages that then need to be assigned a range for assessing individual investments/BDCs. BDCs can be volatile and timing is everything for investors that want to get the “biggest bang for their buck” but still have a higher quality portfolio that will deliver consistent returns over the long-term.

The following chart uses the information from the previous chart showing the average yield spread between BDCs and Corp B. I consider BDCs oversold when the yield spread approaches 4.5% higher and overbought when it is closer to 2.5%. This would imply that BDCs are currently priced appropriately relative to Corp B debt yields as the current yield spread is almost 3.5% (the difference between 9.85% for BDCs and 6.40% for Corp B).

BDCL typically under-performs due to fees and index allocations but can be a good investment if timed correctly as shown below:

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