January 28, 2022
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.