Rising above rate cuts: why floating rate funds still make sense

Investing in Bank Loans: Why We Maintain Conviction

Macro factors and high yields may continue to serve the asset class well

Key Takeaways

• Portfolio Manager Chandler Perine believes bank (i.e., leveraged or floating rate) loans remain an attractive investment option in the current environment given their low base rates and high yields, provided the U.S. economy continues to grow, the Trump administration continues to pursue inflationary policies such as higher tariffs, and the Federal Reserve remains reticent to cut policy rates.
• Leveraged loan yields, which consist of a base rate derived primarily from the New York Federal Reserve's Secured Overnight Financing Rate (SOFR) plus a spread above that rate that has averaged about 472 basis points the past 10 years, offer a high level of income that can help offset a potential decline in loan prices.
• With the expectation that market volatility and economic uncertainty is likely to continue, Perine indicates that with bank loans being in a position at the top of the capital structure, they provide some insulation from downside risk relative to other non-investment-grade income assets.
• When investing in bank loans, Perine says vigilant credit selection is imperative, especially understanding the fundamental outlook, asset coverage, and collateral protection, and that Fidelity's high-yield research team has the resources and experience when seeking to identify attractive loans and avoid pitfalls for the portfolios it manages.