Floating rate funds
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I’m new to this forum and I should have posted my first topic here, which went to the general topics. I’ve been in the industry now for four years. I solicit clients as well as manage my clients’ and our firms advisory and brokerage portfolios.
My question is, how does floating rate funds or bank loans fit in your portfolio? Is it a good time now to get some of it in your asset allocation?
If you truly manage money yourself for your firm I would hope you wouldn’t need to ask such a question.
Let me rephrase this newbie question in this newbie forum then:
If I haven’t been in the industry now for four years, and I do not solicit clients, and I do not manage my clients’ accounts in any advisory capacity, and I’m just chatting with some guy selling floating rate funds at Starbucks, what good would avoiding interest rate risk is in this current environment as opposed to being exposed to the credit risk of bank loans? I wonder if my financial advisor would advise me to face interest rate risk now rather than credit risk?
Floating rate bonds usually trade at about Libor plus 200 to 300bp. Now they are trading about +800beeps. The approximate historical defalt rate on Floaters is about 2 to 3% with about a 70 cents on the dollar recovery final workout.
So lets assume that the credit risk on this paper has increased and we get a 10% default rate instead of 3%. We also recover the usual 70 cents on the dollar. Even at more than triple the historic default rate that's only 300beeps of exposure. Yet the market is at a 800bp discount. The market is pricing these bonds at 100% default. Does that mean you or anyone else should buy them? Only you can answer that question.[quote=BondGuy]Floating rate bonds usually trade at about Libor plus 200 to 300bp. Now they are trading about +800beeps. The approximate historical defalt rate on Floaters is about 2 to 3% with about a 70 cents on the dollar recovery final workout.
So lets assume that the credit risk on this paper has increased and we get a 10% default rate instead of 3%. We also recover the usual 70 cents on the dollar. Even at more than triple the historic default rate that's only 300beeps of exposure. Yet the market is at a 800bp discount. The market is pricing these bonds at 100% default. Does that mean you or anyone else should buy them? Only you can answer that question. [/quote]Good analysis man....and thanks.
There certainly is no shortage of cheap assets these days. I think a lot of people who are hiding in the bank are going to be kicking themselves in a year or two.