While bank loans offer protection from rising risk-free rates, they’re callable and frequently redeemed by the issuer in an improving credit environment, when they generally underperform high-yield bonds. But in a deteriorating environment, they drop about the same as high-yield bonds. They can overcome that negative skew, but only rarely.
Over the past couple of years, we added some high-quality floating-rate securities to the portfolios, believing the Federal Reserve would increase short-end rates at some point as both real gross domestic product (GDP) growth and inflation were low but notably positive.
