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  1. #1

    A case for floating rates

    The following is from here
    Timeless Case for Floating-Rate Loans
    1. Attractive yields – The rate on loans was second only to high yield among U.S. fixed-income sectors (as of April 30, 2016).
    2. Protection against interest-rate risk – Loans have
    near-zero duration and rates that move with the underlying
    benchmark – typically Libor.
    3. A structure designed to mitigate credit risk – Senior/secured positioning in the capital structure offers a layer of protection that is unique in the corporate fixed-income market.
    4. A forward-looking allocation – Loans historically have outperformed the broad bond market in flat- and rising- rate environments. We believe loans are likely to be an important source of diversification in the coming years.
    Loan yields have provided historically strong support for total return. The distribution of quarterly total returns on loans since 1992 in Exhibit D shows that those returns were positive 86% of the time.
    When you combine the facts that loans have had higher historical yields and lower duration than traditional bonds,
    you wind up with the Exhibit E scatterplot on the left. It shows how loans have the highest ratio of yield per unit of duration versus other major fixed-income sectors. Exhibit E (right) rounds out the picture, showing loans have had low correlation with other sectors, thanks to their low interest rate sensitivity.

  2. #2
    PIMCO Income Strategy Fund, PFL also concentrates in floating rate loans. Currently available at a 1.7% discount to NAV. Average duration is much longer than EAFAX. However, notice how EAFAX was clobbered in 2008. So, it's short duration doesn't matter much when crunch time comes.

  3. #3
    PIMCO Income Strategy Fund, PFL also concentrates in floating rate loans. Currently available at a 1.7% discount to NAV. Average duration is much longer than EAFAX. However, notice how EAFAX was clobbered in 2008. So, it's short duration doesn't matter much when crunch time comes.

    Sure....but if you anticipate a replay of the Credit Crisis of 2008-09 you don't buy loans or other corporate debt/bonds or stocks. Interest rate policy rates were dropping like a stone....

  4. #4
    My humble opinion is that Floating Rate Bank Loan funds could do very well going forward, if you believe that interest rate increases will become more frequent, and larger, than has been the case in the last few years. If you believe that interest rate increases will continue to be very small, and very infrequent, as they have in the last few years, then I think that Floating Rate Bank Loan funds should be classified as short term plays for active traders to play with.
    I don't see this economy as very vibrant and strong, and I don't think that will support more frequent and larger interest rate increases. Of course, my crystal ball is known to have imperfections!

  5. #5
    This discussion caused me to take a look at a couple fr loan CEFs that existed back in the mid-04 to mid-06 period when Fed was pretty rapidly raising rates, but there was obviously no 08-ish credit crisis.
    Admittedly, two funds may be poor representatives of the bunch, but what I noticed was that:
    NSL and VVR increased distributions from around 4c to around 6c during the period -- cool, and operating as expected. Further, during the period both fund NAVs were remarkably flat -- NSL NAV dropped 11c over that 2yr period and VVR dropped just 5c.
    However, the market price of both fell quite a bit VVR down 53c = 6% and NSL (because it had an inexplicable premium) 170c = 17%. I'd guess the market price performance is largely attributable to a price run up in anticipation of a tightening cycle. I wonder if the run up in these pups since this February doesn't have some of the same anticipation built in??

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