Mid-Year Outlook 2018
Rising Rates Can Be a Nightmare for Fixed-Income Investors

Rising Rates Can Be a Nightmare for Fixed-Income Investors – But There Is an Alternative Solution

Senior secured loans may provide an alternative income solution with downside protection.

Sponsored by Resource

By Michael Terwilliger, CFA®

As today’s investment environment continues to evolve, many fixed-income investors may find themselves dreaming of the bond markets of the 1970s, 80s, and 90s. These markets were particularly “nice” to fixed-income investors, paying high yields thanks to sky-high interest rates.

However, today’s environment may seem more like a nightmare. After 30 years of falling interest rates, they are finally trending higher from historic lows, with no signs of slowing down.

As a result, many fixed-income investors are facing a dilemma. Even as interest rates rise, bonds are still paying historically low yields, leaving investors needing more to reach their income goals. And bonds of tomorrow have the potential to pay much higher yields if rates continue to rise. This leaves investors to ponder whether they should hold their current bonds to maturity and limit their upside potential in a higher-yielding bond-market, or sell off their current bonds at a loss, possibly eroding principal.

One potential solution – floating-rate assets, more specifically, senior secured loans. Senior secured loans are debt obligations generally issued by non-investment grade businesses. What makes these loans different? Senior secured loans pay interest at a floating rate that typically resets every 90 days, potentially helping investors earn incremental income as rates rise. And while investors participate in the income upside, in many cases, they will also be protected from the downside risk. That is because 90 percent of loans have a floor, helping to insulate them from a freefall if rates start to drop. It may sound too good to be true, but a loan’s floor provides a minimum level of income no matter where rates stand.

Floating-rate assets like senior secured loans have produced consistent income through various interest rate cycles, and may help investors build a more-resilient fixed-income portfolio as the current investment environment evolves. So as rates continue to rise, and fixed-income investors face increased challenges, senior secured loans may provide an alternative income solution with downside protection.

Michael Terwilliger serves as the Portfolio Manager for the Resource Credit Income Fund.

This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security. The materials included herein are the property of Resource and may not be repurposed in a separate likeness without the express written consent of Resource.

 

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