Middle market debt held by BDCs vs High yield vs Treasury yields

The blue line represents the dividend yield of the VanEck BDC Income ETF (BIZD), which stood at 11.8% as of 28 September, down 5bps from a year earlier. BIZD’s share price declined 14% YoY to USD 12.87, broadly in line with the 14.3% reduction in trailing-12-month distributions to USD 1.52 per share. However, the latest quarterly distribution fell 45.6% YoY and 50.4% sequentially to USD 0.24. Annualizing the latest payout implies a significantly lower forward distribution yield of 7.4%, materially below the current 11.8% trailing yield, questioning the forward-looking attractiveness of the asset class.

Headline CPI inflation remained at 3.4% YoY in August, while the index increased 0.4% MoM as gasoline prices rose 3.9% and accounted for more than one-third of the monthly increase. Following which, Fed raised the federal funds target range by 25bps to 3.75%-4.00% on 16 September. The increase reinforces the higher-rate environment with market expecting more rate hikes adding to refinancing and debt-service pressure for leveraged middle-market borrowers, potentially affecting BDC portfolio performance and distribution stability.

The orange line represents the effective yield on the BofA US High Yield Index, which rose to 8.0% on 28 September, up approximately 100bps from a month prior incorporating the rate hike and its potential risks. BIZD’s trailing distribution yield offered a 381bp premium to the index, down from 541bps a year earlier and below its 559bp one-year average. However, on a forward basis most of that apparent premium disappears, with an implied deficit of 60bps.  The forward comparison is more relevant as BIZD investors are exposed to variable distributions, leveraged BDC equity, middle-market credit risk and potentially much greater mark-to-market volatility, while high-yield bonds provide contractual coupon and principal claims, subject to credit risk.

BIZD’s distribution-yield spread over the 2-year Treasury narrowed to 692bps on 28 September from 826bps a year earlier and remained below its 860bp one-year average. On a forward basis, the spread notably narrows to approximately 251bps, raising the question are investors compensated enough to take the middle-market BDC risk?

*As of 31 August 2026, BIZD’s weighted average market cap stands at USD 5.8bn, with PE ratio of 14.41 and PB of 0.92, with the entire portfolio holdings in publicly traded BDCs. Click here for top holdings.

(Past performance is no guarantee of future results.)