Loan and Behold: Floating-Rate Loans for Rising Rates

Boston - As the old bond market axiom portends, "Don't fight the Fed." The reason why has been underscored for all of 2018.

Bond prices fall as interest rates rise, and this year has proven to be a downright case study. Why? The Federal Reserve has remained on its unwavering course to normalize interest rates from their still-low levels. And its "dot plot" projections for the rest of 2018 as well as 2019 show plenty more Fed hikes to come. Being a discounting mechanism by nature, the markets have begun to take all of this into account.

The resulting performance picture hasn't been pretty for fixed-income positions, with deteriorating net asset values subtracting from investor total returns. In fact, most bond market sectors have posted negative results so far this year -- bonds have served only to detract from investors' overall performance experience. Alas, the so-called "balanced portfolio" of 60% stocks (S&P 500) and 40% bonds (U.S. Aggregate) has returned just 2.5% year-to-date, making it a tough year for investors indeed.

Meantime, our asset class -- the market for senior, secured, floating-rate corporate loans -- has proven to be a bright spot in capital markets. The main driver of year-to-date loan market performance has been the combination of high coupon income, limited credit situations and healthy supply/demand equilibrium. The performance picture is worth a thousand words.


Data provided is for informational purposes only. Past performance is no guarantee of future results.