Floating-Rate Loans: A Winning Strategy in a Rising Interest Rate Landscape

For income-seeking investors, the landscape is changing. With the Federal Reserve consistently raising interest rates, bond yields have increased over the past year, though prices have not followed suit. In these unusual times, leveraged loans, also known as floating-rate loans, have emerged as an attractive alternative, even beating traditional bonds. Let’s explore why this phenomenon is happening and how floating-rate loans could be a viable investment option for the future.

Rising Interest Rates and Bonds: A Dichotomy

As the Federal Reserve continues to grapple with high inflation, interest rates are likely to remain on an upward trajectory, particularly if the economy sustains its growth. Though bond yields have risen, prices, which move in the opposite direction of yields, have remained largely stagnant.

Eric Mollenhauer, manager of Fidelity® Floating Rate High Income Fund (FFRHX), emphasized that leveraged loans returned 10.97% from June 2022 to June 2023, significantly outperforming investment-grade bonds, which returned −0.94%. The current modest economic growth is creating a favorable environment for leveraged loans.

What Makes Leveraged Loans Unique?

Unlike conventional bonds that pay fixed interest rates, leveraged loans adjust their interest rates periodically based on a publicly available, short-term interest rate like SOFR (Secured Overnight Financing Rate). This flexibility gives them a significant advantage over fixed-rate bonds in a rising interest rate environment.

A Closer Look at Leveraged Loans:

  • Purpose: Companies often use these loans to refinance debt, fund mergers, or finance projects.
  • Risk Profile: Leveraged loans are usually given to below investment-grade companies, indicating higher risk but also higher yields.
  • Collateral: These loans are secured by tangible assets like real estate and equipment or intellectual properties, such as brands and trademarks.
  • Flexibility: The floating interest rate mechanism allows them to align with key consumer interest rates, offering a hedge against inflation.

The Growth of the Loan Market

The leveraged loan market has witnessed immense growth, swelling from $500 billion in 2010 to roughly $1.4 trillion as of June 2023. This market has attracted large and established borrowers, giving them an alternative to traditional bonds for raising capital.

Why Invest in Leveraged Loans?

Floating-Rate Loans: A Winning Strategy in a Rising Interest Rate Landscape

  1. Inflation Protection: As interest rates adjust upward with inflation, leveraged loans provide protection against eroding purchasing power.
  2. Diversification: Leveraged loans have been historically positively correlated with inflation and negatively correlated with Treasurys, adding diversity to investment portfolios.
  3. Higher Yields: These loans typically offer high yields due to the additional risk of lending to non-investment-grade borrowers.

The Risks of Investing in Leveraged Loans

Investing in leveraged loans isn’t without its risks:

  • Credit Risk: There’s always a chance that the borrower may default.
  • Market Liquidity: As unregistered securities, leveraged loans can encounter periods of imbalance between buyers and sellers, leading to fair value trading difficulties.
  • Non-Guaranteed: Unlike bank accounts, these investments are not guaranteed by banks or the FDIC.

How to Invest in Leveraged Loans

Individual investors can access leveraged loans through professionally managed mutual funds or ETFs. These funds offer daily liquidity, diversification, and the potential for returns.

  • Fidelity Funds: Fidelity® Multi-Asset Income Fund (FMSDX), Fidelity® Floating Rate High Income Fund (FFRHX)
  • Non-Fidelity Funds: T. Rowe Price Floating Rate Fund (PRFRX), BlackRock Floating Rate Income Portfolio (BFRAX), PGIM Floating Rate Income Fund (FRFAX)

Conclusion

In a world where the Federal Reserve seems determined to combat inflation with higher interest rates, leveraged or floating-rate loans have proven to be an attractive option for income-seeking investors. Offering a unique combination of inflation protection, potential for higher yields, and diversification, they have outperformed traditional bonds in the past year.

However, as with all investments, understanding the risks and consulting with a financial professional to align with your risk tolerance and investment objectives is paramount. Leveraged loans could be an exciting addition to your portfolio if used judiciously and in harmony with your overall investment strategy.

Author:Com21.com,This article is an original creation by Com21.com. If you wish to repost or share, please include an attribution to the source and provide a link to the original article.Post Link:https://www.com21.com/floating-rate-loans-a-winning-strategy-in-a-rising-interest-rate-landscape.html

Like (1)
Previous August 10, 2023 1:39 pm
Next August 10, 2023 9:17 pm

Related Posts

  • Unraveling the Reverse Mortgage Mystery: A Comprehensive Guide to Understanding Reverse Mortgages

    Introduction: Reverse mortgages have long been a subject of confusion and misconception for many homeowners. However, when understood and utilized correctly, they can be a valuable financial tool for retirees looking to supplement their income or cover unexpected expenses. In this blog post, we’ll explore what a reverse mortgage is, how it works, the benefits it offers, and everything else you should know before considering this financial option. What is a Reverse Mortgage? A reverse mortgage is a type of loan available to homeowners who are 62 years of age…

    March 23, 2023
    0
  • CashUSA.com: Your Go-to Source for Quick and Reliable Personal Loans

    Introduction Personal loans have become increasingly popular as a financial tool to help individuals cover unexpected expenses, consolidate debt, or even finance a dream vacation. With so many lenders and online platforms available, finding a trustworthy and efficient source for obtaining a personal loan can be challenging. Enter CashUSA.com, one of America’s most trusted resources for cash loans. In this blog post, we will introduce you to CashUSA, discuss its advantages, and provide you with compelling reasons to choose CashUSA for your personal loan needs. Introducing to CashUSA CashUSA.com is…

    April 27, 2023
    0
  • Empowering Small Businesses: Exploring Fundera by NerdWallet and Their Diverse Loan Offerings

    As a small business owner, navigating the world of financing can be daunting. Access to capital is essential for growth, but finding the right loan product that suits your needs can be challenging. Fundera by NerdWallet (www.fundera.com) is a platform dedicated to helping small businesses secure the funds they need through a range of loan options, including SBA 7(a) loans, term loans, invoice factoring, and more. In this blog post, we’ll introduce you to Fundera and discuss their services to help you determine if they’re the right fit for your…

    May 2, 2023
    0
  • A Comprehensive Review: Empowering Financial Opportunities with BadCreditLoans.com

    Life, as we know it, can often throw curveballs in the form of unforeseen circumstances that require immediate financial assistance. In such scenarios, a healthy credit score can be a real savior, paving the way to secure quick loans. However, what if your credit score is less than stellar? BadCreditLoans.com is a platform designed to help those with poor credit scores secure personal loans quickly and efficiently. BadCreditLoans.com is a unique portal where those struggling with bad credit can connect with lenders willing to provide loans, despite the credit shortcomings….

    July 22, 2023
    0
  • Investing in US Treasury Bonds: A Comprehensive Guide on T-Bills, T-Notes, T-Bonds, and How to Buy Them

    US Treasury Bonds, also known as Treasuries or T-Bonds, are issued by the US Department of the Treasury to fund the federal government’s borrowing needs. These bonds are considered a safe investment because they are backed by the full faith and credit of the US government. There are three types of Treasury securities: T-Bills, T-Notes, and T-Bonds. T-Bills are short-term debt securities with maturities of one year or less. T-Notes are intermediate-term debt securities with maturities of two, three, five, seven, or ten years. T-Bonds are long-term debt securities with…

    March 8, 2023
    0
  • Lendio Review: Revolutionizing Small Business Financing with a Streamlined Loan Marketplace

    Introduction Navigating the world of small business financing can be a daunting task. With countless options, complex terms, and varying interest rates, it’s easy to feel overwhelmed when trying to secure funding for your business. That’s where Lendio (www.lendio.com) comes in. Formerly known as Funding Universe, Lendio is a free online loan marketplace that aims to simplify the process for small business owners in the United States. In this blog post, we’ll introduce you to Lendio, discuss its features, benefits, and how it can help you find the best financing…

    April 26, 2023
    1
  • How to Choose a Mortgage in a High Rate Environment

    Shopping for a mortgage is daunting at the best of times. But in today’s climate with soaring interest rates, locking in a long-term loan might feel like diving into the deep end. Fear not! With a bit of knowledge and guidance, you can navigate these waters and make an informed decision that’s right for you. 1. Fixed-rate vs. Adjustable-rate Mortgages What are they? Fixed-rate mortgage: A mortgage where the interest rate, and subsequently the monthly payments, remain consistent throughout the loan term. Adjustable-rate mortgage (ARM): A mortgage where the interest…

    September 14, 2023
    0
  • Review: Navigating the World of Credit Union Loans

    Credit Unions, unlike traditional banks, are member-owned financial cooperatives. They are created and operated by their members, and profits are shared amongst the owners. To join a credit union, you typically have to meet certain criteria like living in a specific area or working for a specific employer. Once you become a member, you gain access to a plethora of financial products, including savings and checking accounts, credit cards, and of course, loans. What sets credit unions apart is their commitment to their members. They often offer lower fees, higher…

    May 12, 2023
    0
  • The Inverse Relationship of Bonds and Stocks: Understanding the Benefits of Bond Investment During Economic Downturns

    “Understanding the Relationship Between Bonds and the Stock Market: Why Bonds Tend to Perform Oppositely and Why They are a Good Investment During a Recession” Bonds and stocks are two of the most popular forms of investments, and they are often considered to be inversely related. This means that when stocks are performing well, bonds tend to perform poorly, and vice versa. In this article, we will explore the reasons behind this inverse relationship and why bonds are a good investment during a recession. One of the main reasons for…

    January 24, 2023
    0
  • MaxLend Installment Loans: A Flexible and Reliable Financial Solution for Borrowers

    Introduction When you’re in need of quick cash to cover unexpected expenses or to simply get by until your next paycheck, finding a reliable solution can be crucial. Among the myriad of loan options available, Multi-Pay Installment Loans have become increasingly popular. In this blog post, we will explore and review MaxLend Installment Loans, a reputable provider of these loans. We will cover the advantages, benefits, and reasons for choosing MaxLend for your financial needs. What is a Multi-Pay Installment Loan? A Multi-Pay Installment Loan is a type of short-term…

    April 27, 2023
    0

Leave a Reply

Your email address will not be published. Required fields are marked *