{"id":8184,"date":"2023-05-13T09:55:17","date_gmt":"2023-05-13T13:55:17","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/the-fed-might-finally-let-these-11-yielders-off-the-floor\/"},"modified":"2023-05-13T09:55:18","modified_gmt":"2023-05-13T13:55:18","slug":"the-fed-might-finally-let-these-11-yielders-off-the-floor","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=8184","title":{"rendered":"The Fed Might Finally Let These 11% Yielders Off The Floor"},"content":{"rendered":"
\n

What\u2019s up with floating-rate funds? Why haven\u2019t they all, well, floated<\/em> higher <\/em>in price as interest rates have risen over the past couple of years?<\/p>\n

Is there any hope<\/em> that they\u2019ll finally float<\/em>?<\/p>\n

Today we\u2019ll discuss five such funds\u2014underperforming yet now cheap because of it\u2014yielding up to 11.7%. Can they live up to their billing? We contrarians want to know because they are trading at large<\/em> discounts to their net asset values (NAVs).<\/p>\n

First, a primer on floaters. Floating-rate securities such as bank loans have variable coupons (interest payments) that are recalculated regularly\u2014often quarterly, sometimes monthly\u2014to reflect changes in short-term interest rates. Typically, rates will start with a reference rate (say, the Fed funds rate) and have a defined payout percentage tacked on. If that reference rate heads higher, so too does the coupon\u2019s payout.<\/p>\n

In theory, then, the Fed\u2019s nonstop hikes over the past year-plus should\u2019ve been quite the catalyst for floaters. But, for whatever reason, that hasn\u2019t happened.<\/p>\n

Yes, variable-rate bank loans have a natural leg up on fixed-rate debt. Which is exactly why they haven\u2019t cratered nearly as hard as Treasuries and other traditional bonds. But they still have credit risk\u2014and it\u2019s that credit risk that has made them less than steady in this economic environment.<\/p>\n

<\/fbs-ad><\/p>\n

So, when might bank loans have their day? Research from AllianceBernstein points at what you should be looking for:<\/p>\n

\n \u201cIn fact, history suggests that the best time to buy bank loans isn\u2019t when rates are rising but after growth has slowed, the Fed has reduced interest rates and companies have started to clean up their balance sheets and repair their credit metrics.\u201d<\/em>\n<\/p><\/blockquote>\n

That day might not be today, but it\u2019s nearing. The Fed has already signaled that its rate hikes might be at an end. And growth is indeed slowing\u2014U.S. GDP was up just 1.1% in Q1, and economists expect a tepid 0.3% number come Q2.<\/p>\n

The time to buy might be soon\u2014and better still, several floating-rate strategies not only are offering 10.9% to 11.7% yields at deep nominal discounts to their net asset values (NAV), but they\u2019re even trading more cheaply than their long-term averages.<\/p>\n

We\u2019ll start with a pair of Nuveen funds: Nuveen Floating Rate Income Opportunity (JRO, 11.4% distribution rate) <\/strong>and Nuveen Senior Income Fund (NSL, 11.4% distribution rate)<\/strong>.<\/p>\n

Floating Rate Opportunity must invest at least 65% of its portfolio in adjustable-rate senior secured loans\u2014effectively, the highest priority in any company\u2019s capital structure. The rest of the portfolio can be made up of unsecured senior loans, as well as secured and unsecured subordinated loans. Nuveen Senior Income has a slightly stricter mandate, insisting on at least 80% investment in senior secured loans.<\/p>\n

But despite differing ground rules, they\u2019re being managed very similarly, with both sitting on 82%-83% in senior loans, another 15% in corporate bonds and the rest scattered among common stocks, warrants and other assets. Their debt leverage usage is similar, too, at a sky-high 39% apiece.<\/p>\n

Unsurprisingly, there\u2019s little difference in how the pair have performed since the start of 2022, when rate-hike fears really started in earnest\u2014followed by the actual ramp-up in the Fed funds rate. Both were crushed compared to the plain-Jane Invesco Senior Loan ETF (BKLN)<\/strong>, largely thanks to that high leverage amplifying losses.<\/p>\n

However, both now trade at considerable discounts of roughly 13% to NAV, both of which are deeper deals compared to their longer-term averages of about 10%.<\/p>\n

One of the deepest discounts among floating-rate funds is the Apollo Senior Floating Rate Fund (AFT, 10.9% distribution rate)<\/strong>, which typically trades at an 11% discount to NAV, but currently is trading at 15%\u2014that\u2019s just 85 cents on the dollar!<\/p>\n

AFT is committed to investing at least 80% in senior secured loans; in reality, it has much more than that, at 93% versus just 7% in bonds. But what stands out most is the CEF\u2019s credit profile:<\/p>\n

AFT Deals in Much<\/em> Riskier Loans<\/strong><\/p>\n

Interestingly, that loan profile hasn\u2019t made much of a difference during the broader downturn, even despite a hefty 36% in debt leverage. But it has given AFT a long-term performance edge against the two Nuveen funds.<\/p>\n

BlackRock Floating Rate Income Strategies Fund (FRA, 11.3% distribution rate) <\/strong>sits between JRO\/NSL and AFT from a credit-quality standpoint. And it\u2019s even more strictly invested in bank loans, which make up 97% of the portfolio.<\/p>\n

FRA sticks out for its (relatively) low usage of debt leverage\u2014about 25% compared to the mid to high 30s of the other CEFs on this list. That\u2019s not as helpful on the way up, but it has helped BlackRock\u2019s fund lose less on the way down.<\/p>\n

The flip side? FRA isn\u2019t cheap. Yes, it\u2019s trading at a roughly 9% discount to NAV, but that figure is par for the course over the past five years.<\/p>\n

Then we have our old friend Eaton Vance Floating-Rate Income Trust (EFT, 11.7% distribution rate)<\/strong>. Manager Ralph Hinckley and his predecessor, Scott Page, have historically done well in rising-rate environments because their loans, on average, reset every 45 days. EFT isn\u2019t stranded when rates rise\u2014Ralph and Scott usually cycle into higher-paying investments.<\/p>\n

Ralph and his predecessor, Scott Page, have done well in rising rate environments because their loans, on average, reset every 45 days. EFT isn\u2019t stranded when rates rise\u2014Ralph and Scott usually cycle into higher-paying investments. But this latest interest-rate cycle has proven too quick for most bank loan managers, Ralph included.<\/p>\n

The good news? EFT should be in prime position once the cycle becomes more favorable to bank loans. For now, you can capture a deeper-than-usual 11% discount to NAV on the CEF\u2019s shares.<\/p>\n

Brett Owens is chief investment strategist for <\/em>Contrarian Outlook<\/em>. For more great income ideas, get your free copy his latest special report: <\/em>Your Early Retirement Portfolio: Huge Dividends\u2014Every Month\u2014Forever.<\/p>\n

Disclosure: none<\/em><\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

What\u2019s up with floating-rate funds? Why haven\u2019t they all, well, floated higher in price as interest rates have risen over the past couple of years? Is there any hope that they\u2019ll finally float? Today we\u2019ll discuss five such funds\u2014underperforming yet now cheap because of it\u2014yielding up to 11.7%. Can they live up to their billing? […]<\/p>\n","protected":false},"author":1,"featured_media":8185,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-8184","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nThe Fed Might Finally Let These 11% Yielders Off The Floor | iFintechWorld<\/title>\n<meta name=\"description\" content=\"What\u2019s up with floating-rate funds? 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