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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