Three views on value in today’s floating rate market
Floating-rate loans have proven themselves as potentially valuable additions to traditional fixed-income portfolios. They may improve portfolio efficiency and mitigate the impact of rising rates, thanks to near-zero duration and yields that historically have been second only to high- yield bonds, among US fixed-income sectors. However, following sub-par performance in 2014, we feel it is a good occasion to address several questions on value and credit quality. Our belief is that this market offers good tactical opportunities to establish or add to a core strategic floating-rate portfolio allocation.
A growing risk aversion on the part of retail investors last year broadly affected credit risk sectors like float- ing-rate loans and high-yield bonds, as mutual funds for both sectors experienced net outflows. Floating-rate loan prices fell by 2.4%, partially offsetting income gains, and reducing total return.
In our view, last year’s negative sentiment was at odds with the strengths of the floating-rate loan market in a broadly improving US economy. We see three broad reasons why floating-rate loans offer value.
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