A solution during rising rates: Floating-rate loans

A solution during rising rates: Floating-rate loans

During periods of rising rates, floating-rate loans historically have outperformed higher-quality US government securities and corporate credit. Bank loans can provide necessary income while having virtually no duration, helping diversify risk in traditional fixed-rate bond portfolios.

Performance during periods of rising rates

Source: Morningstar, December 2021

Past performance does not guarantee future results.

Investing involves risk, including the possible loss of principal.

Bank loans: S&P/LSTA Leveraged Loan Index; Core bond: Bloomberg US Aggregate Index; Short-term govt/credit: Bloomberg 1-3 Year US Government/Credit Index; Investment grade (IG) bonds: Bloomberg US Corporate Investment Grade Index

Rising rates are defined as periods during which the federal funds rate increased by more than 1 percentage point during that span of time. 2015-2018: 12/17/2015- 12/20/2018. 2004-2006: 6/30/2004- 6/29/2006 1999-2000: 6/30/1999 - 5/16/2000.

What this means for investors

Low yields and compressed spreads, combined with a potential rising rate environment, have created a challenge for investors: how to position within fixed income. Bank loans offer a potential solution, to help reduce interest rate exposure while generating income. In this unique area of the fixed income market that relies heavily on fundamental research and credit selection, investors may benefit from an active manager with long-term experience in the asset class.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of December 2021, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Fixed income securities and bond funds can lose value, and investors can lose principal as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt. This includes prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

Investments may not receive payment of principal, interest, and other amounts due in connection with bank loans and other direct indebtedness because they primarily depend on the financial conditions of the borrower and lending institution.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Chart is for illustrative purposes and is not representative of the performance of any specific investment.

The Bloomberg 1-3 Year US Government/Credit Index is a market value-weighted index of government fixed-rate debt securities and investment grade US and foreign fixed-rate debt securities with average maturities of one to three years.

The Bloomberg US Aggregate Index is a broad composite that tracks the investment grade US bond market.

The Bloomberg US Corporate Investment Grade Index is composed of US dollar-denominated, investment grade corporate bonds that are US Securities and Exchange Commission (SEC)-registered or 144A with registration rights, and issued by industrial, utility, and financial companies. All bonds in the index have at least one year to maturity

The S&P/LSTA (Loan Syndications and Trading Association) Leveraged Loan Index is a broad index designed to reflect the market-value-weighted performance of US dollar-denominated institutional leveraged loans.

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