When Rates Rise, Consider Floating-Rate Loans

Here’s our case for floating-rate loans during a rate-hike cycle.

By
Craig Imamura
Senior Product Strategist, Pacific Funds
&
Download PDF

Compared to many fixed-income asset classes, floating-rate loans (also known as bank loans) have historically done well during past rate-hiking cycles. With expectations for several rate hikes by the Federal Reserve this year and in 2023, here are three reasons to consider investing in floating-rate loans.

1) Floating-rate loans have historically done well generating returns in rate-hike cycles, which typically have been a difficult period for traditional fixed-income asset classes.

2) The floating-rate nature of the asset class has helped investors during periods of rising interest rates, as the interest rate on loans typically resets every 30-90 days based on the new rate environment and generally move in tandem with the federal funds rate.

3) Floating-rate loans in 2021 recorded only five defaults, a low that's only been matched once in the last 14 years.

Default rates have always been a major factor for investors considering floating-rate loans, which is a primarily non-investment-grade asset class. But with default rates currently tracking well below their historic average of 2.53% (the percentage for January 2022 clocked in at 0.29%), the historical default risk could be significantly reduced in the near term.

Definitions

Bloomberg Aggregate Bond Index includes investment-grade U.S. government and corporate bonds, mortgage pass-through securities, and asset-backed securities.

Emerging-market bonds are debt instruments issued by developing countries.

The federal funds rate is the interest rate that banks charge each other to borrow or lend excess reserves overnight

Floating-rate loans (or bank loans) are financial instruments that pays a variable or floating interest rate. A floating-rate fund invests in bonds and debt instruments whose interest payments fluctuate with an underlying interest-rate level.

A global bond is a type of bond issued and traded outside the country where the currency of the bond is denominated.

High-yield bonds are represented by Bloomberg US Corporate High-Yield Index, which measures the USD-denominated, high-yield, fixed-rate corporate bond market.

Investment grade refers to the quality of a company's credit. To be considered an investment-grade issue, the company must be rated at "BBB" or higher by Standard and Poor's or Moody's.

Mortgaged-backed securities (MBS) are bonds secured by home and other real estate loans.

Pacific Asset Management LLC is the sub-adviser for the Pacific Funds Fixed Income Funds. The views in this commentary as of the publication date and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment. The opinions expressed herein are subject to change without notice as market and other conditions warrant. Any performance data quoted represents past performance which does not guarantee future results. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. Sector names in this commentary are provided by the Funds’ portfolio managers and could be different if provided by a third party.

Past performance does not guarantee future results. All investing involves risks including the possible loss of the principal amount invested. High-yield/high-risk bonds (“junk bonds”) and floating-rate loans (usually rated below investment grade) have greater risk of default than higher-rated securities/higher-quality bonds that may have a lower yield. Corporate bonds are subject to issuer risk in that their value may decline for reasons directly related to the issuer of the security. Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Investors should consider a fund’s investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or summary prospectus contains this and other information and should be read carefully before investing. The prospectus can be obtained by visiting PacificFunds.com.

Pacific Funds and Pacific Asset Management LLC are registered service marks of Pacific Life Insurance Company (“Pacific Life”). S&P is a registered trademark of Standard & Poor’s Financial Services LLC. All third-party trademarks referenced by Pacific Life, such as S&P, belong to their respective owners. References of third-party trademarks do not indicate or signify any relationship, sponsorship or endorsement between Pacific Life and the owners of referenced trademarks.

Pacific Funds are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and are available through licensed third parties. Pacific Funds refers to Pacific Funds Series Trust.

More Insights

Subscribe to receive industry news and insights

Welcome

Please choose your role

This site is intended for FINANCIAL ADVISORS ONLY.

This version of the website is specifically intended for financial advisors and other investment professionals and may not be used with or by individual investors. The content and investment strategies may not be suitable and/or available to all investors. By clicking accept and accessing this website, you represent and warrant that you are authorized to conduct investment business in the United States, and that you are authorized under the U.S. federal securities laws and FINRA rules to receive material relating to investments, securities markets and research made available only to institutional investors. You further represent and warrant that you will utilize such materials only for their stated purpose.

CANCEL
ACCEPT

This site is intended for REGISTERED INVESTMENT ADVISORS AND INSTITUTIONAL INVESTORS ONLY.

This version of the website is specially intended for Institutional Investors only. Institutional Investors include registered investment advisors, defined contribution and defined benefits plans, foundations, endowments, consultants, insurers and trust administrators/ custodians. The content and investment strategies may not be suitable and/or available to all investors. By clicking accept and accessing this website, you represent and warrant that you are authorized under the U.S. federal securities laws and FINRA rules to receive material relating to investments, securities markets and research made available only to institutional investors. You further represent and warrant that you will utilize such materials only for their stated purpose.

CANCEL
ACCEPT
Copyright 2022 © Pacific Life Insurance Company
Please Upgrade Your Browser.

Unfortunately, Internet Explorer is an outdated browser and we do not support it. To have the best browsing experience, please upgrade to Google Chrome, Firefox or Safari.

Upgrade