There’s a general notion that certain sectors get clobbered when the Federal Reserve raises rates, and there are two reasons for that idea. The industry either uses a lot of debt to finance its operations or stocks of a particular sector are high yielding – either due to their tax structure or the general nature of their underlying businesses. In some cases like utilities and real estate investment trusts (REITs), it’s both reasons.
And that’s why the rise in business development companies (BDCs) is so strange.
By all accounts, BDCs should be dying right now as the Fed has embarked on its rate normalization schedule. And yet, the high-yielding sector has been killing it. For investors, the question is whether the gains are just a head fake or the start of a true rally.