(Credit goes to Michelle Borre CFA, Oppenheimer Funds; “Will Trumponomics Bring a New Interest Rate Regime?” and Scott Page CFA and Craig Russ Co-Directors of Bank Loans at Eaton Vance “Fed Delivers Continued Tailwind for Floating Rate Loan Investors”.)
None of the information below is to be considered a recommendation to buy, hold or sell any particular position.
The following stated goals from President Elect Trump could bring sweeping change to some long-held market views on interest rates:
- Fiscal stimulus in the form of corporate and individual tax cuts;
- Incentives to bring offshore cash back on shore;
- Increased infrastructure spending;
- Tariffs or taxes on imported goods which still cause these goods to be more expensive to purchase.
If all of these changes are enacted, the 35-year bull market in interest rates would come to an end and rates would begin to rise.
The high employment rate in the U.S. could also potentially lead to inflation, which gives yet another reason to increase interest rates.
What’s an investor to do?
Among others, one option is to consider senior floating rate funds. Why?
Floating-rate loans should return to their longstanding historical character as an asset class that benefits bond portfolios in a rising-rate environment, driven by two principal forces.
First, unlike fixed-rate bonds, loans have a floating rate that resets periodically, and the absence of duration provides protection against rising interest rates.
Second, rising coupons have been accretive to performance the more that short-term rates rise. For example, loans performed well in the tough bond years of 1994, 1999, and 2004-2006. While we also know that the past in not an indicator of the future, we think this is worth a conversation.
Resonate has successfully used floating rate funds in our portfolios for the past 10 years. We will assess whether or not to increase the presence of these funds when we next meet.
For those of you who are not Resonate clients, we offer a complimentary conversation and portfolio review to discuss whether floating rate funds might be appropriate for you.
Barbara A. Culver
CFP®, ChFC®, CLU, AEP®