Senior loans, because of their floating rate coupons, typically have low interest rate sensitivity. This unique feature makes senior loans attractive when interest rates rise. While it is difficult to predict the direction of rates, we believe senior loans warrant an allocation in any interest rate environment.
Senior loans tend to offer relatively high yields, and because of their low interest rate sensitivity (duration), they are less susceptible to price declines when rates rise. Allocating a portion of a fixed income portfolio to senior loans has the potential to lower a portfolio’s interest rate sensitivity and help increase yield.
Due to their floating rate coupons and low duration, senior loans have outperformed during periods of a rising federal funds rate, the target rate established by the Federal Reserve, and what banks use to lend and borrow overnight funds to each other. They have also outperformed during recent periods of increasing longer term rates, which are determined by capital market activity.
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Short-term interest rates and longer term treasury rates may or may not move in tandem directionally or in magnitude.
Senior loans are typically lower rated and may be illiquid investments (which may not have a ready market). Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share price can fall. Derivative instruments entail higher volatility and risk of loss compared to traditional stock or bond investments.
These views represent the opinions of the Portfolio Manager and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.