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Rising rates and what to do!

I am looking to replace most of my IB (GIBLX) and some of my MU (PTIAX) monies (I'm holding onto PONDX) with a bank loan or something that is going to do a better in, what appears to now be, a rising interest rate environment.

There's a lot of positive discussion about SAMBX (Ridgeworth Floating rate) but not much on Lord Abbett Floating Rate (LFRAX.LW). I've been doing some research and came across this OEF, among a few others.

LFRAX metrics are superior to SAMBX, and its returns are equally as solid.

Any thoughts on LFRAW (LW at FIDO) vs. SAMBX or any other BL funds??

Am I premature (or too late) thinking about this move. I just don't see GIBLX or PTIAX doing very well as interest rates rise. Am I misguided, panicking, wrong????

Thanks, Matt


  • msf
    edited November 2016
    One question is always how fast rates will rise. For example, GIBLX, with an SEC yield around 4% and a modified average duration of 4+ years might be expected to return a tad south of 2% if rates rose 1/2% in the next year (lose 2% on price, gain 4% on interest). Not great, but not a disaster.

    Bank loan funds have their own risks. Often the loans they invest in have floor rates of 1%, and are keyed to 3 month LIBOR. That's currently at 0.88%. Until it rises above 1%, the interest rates on these loans won't rise (since they are already above LIBOR). So these don't float - yet (it's close). So they still have a bit of interest rate risk. (August report)

    They also have credit risk. The debt they own has low credit ratings (around B). Consequently the debt behaves more like stocks and is sensitive to the economy. If rising rates depress stocks, these funds may start experiencing defaults. The good news is that since they hold senior loans, they would likely recover more of their principal than would typical junk bond funds. Still, there's a real risk of default and getting less than 100 cents on the dollar.

    I'm inclined to think that the market has overreacted, but things are so volatile that in the short term anything could happen. It might make sense to move some money into one of these bank loan funds, but I wouldn't bet the farm on them.
  • Emerging markets also in this volatile period. I only hold TGEIX and MAPIX that are affected. Stay with them?
  • beebee
    edited November 2016
    Here's an article that shed some light on the changing dynamics that face the US, UK and the EU including the possibility of interest rates rising here in the US:


    The full article may require free subscription, but the comment link is worth a free look.
  • edited November 2016
    I'd keep in mind that although there's no way to know what happens next, rates have already risen a lot in a very short time. I'm trying not to do anything too drastic that I'll regret if rates settle into another, higher trading range for a while.

    The post-election narrative that's been helping drive this phase of rate increases is based on assumptions that may or may not play out. But of course there might be another shakeup after a Dec Fed rate bump and a consensus projection of more.

    PTIAX in particular has held up pretty well considering; if you really want to do a protective sell based on more rate increases, I'd reduce GIBLX first, as it's typically got more rate sensitivity.

    On floaters, I've been pairing a higher yielding cef and a safer oef, GIFPX, but for someone who hasn't got any exposure now, I'd say look at the ytd gains and invest accordingly - they've been doing well for more of the year than just recently.
  • I may have read this from another poster here at MFO...seemed worth re-posting for this thread:
  • I wonder, what portion of the currently outstanding domestic floating-rate market has passed the date at which the loans became callable?
  • GREAT information, points and thoughts everyone, THANK YOU!

    I was caught off-guard a little bit by the accelerated rise in the 10-year. I agree that it is probably a bit of an over-reaction, BUT, the trend is still probably up, albeit not in a straight line.

    What happens if the FED does move in Dec. How much of this rate move is baked-in anticipating the Dec. rate hike?

    That is one reason why I am contemplating moving some of my monies into a BL fund.

    Any further thoughts, ideas, suggestions are very welcome; please continue the conversation!

    FYI, I too hold MAPIX and a little DEM, which I am holding on to, but NOT adding to at this point. Any comments or thoughts?

    Thank you, Matt
  • edited November 2016
    mcmarasco says: "I was caught off-guard a little bit by the accelerated rise in the 10-year."

    You're not the only one. Suspect T. Rowe got caught a bit flat-footed. I own several of their conservative funds which have dramatically underperformed relative to my funds at Dodge & Cox and Oakmark the past week. Suspect T. Rowe was positioned for something different than what occurred. Three of their lower-risk funds (which I own) have underperformed noticeably since Nov. 8: PRWCX, RPGAX and TRRIX.

    Some of this relates to bond holdings. (RPGAX in particular is global). More generally, I suspect T. Rowe has been expecting slower growth and constrained government spending and was so positioned in these funds. By comparison, Dodge & Cox (DODBX) is heavily weighted towards financials which have benefitted from the prospect of higher rates and inflation (and likely repeal of Dodd-Frank). And - just a guess - OAKBX probably benefitted from its long-time toe in the water exposure to drillers and energy. Also - they shed most long-term government bonds 2-3 years ago and have remained largely short-duration.

    Sorry: No advice here. But folks have served-up some good ideas. Concur with you that the reaction is probably overdone - but that long-term the trend in rates is higher. FWIW: I'd be very surprised if Yellen is still Fed Chair a year from now. Anything's possible. (Maybe Rudi - if he doesn't take the Secretary of State job? ... :))
  • It's a bit distressing to see all the sudden enthusiasm here, there, and everywhere with floating rate/bank loan funds. The last thing I want to see is that category becoming "groupthink" and the "logical" place to go. In the real world we have seen this category actually decline since November 1 albeit just a tad. Yet at the same time we have seen a huge spike in Treasury rates. Two reasons for this. One is with floating rate the key metric is the 3 month LIBOR rate not the longer term Treasuries. And secondly, since floating rates carry what I would call junk "lite" credits they have been held back a bit with the decline in the junk bond market the past two weeks.

    Below is a link, although a few months old, of one of the better articles I have seen on the floating rate/bank loan sector. Note how the 3 month LIBOR rate historically moves lockstep with the Fed funds rate.
  • I am staying with all my positions at this time, this is not the time to make changes.
  • Keep waiting for PTIAX to post 3rd Q commentary .Maybe they're going the way of less monthly and/or quarterly comment?Here's snippets from just released Annual Report dated August 31,2016
    The past year saw very big
    changes for both the Fund and for fixed-income markets. Fund assets grew more than four times going from $164.37
    million to $688.60 million during the year. Managing that growth and maintaining desired allocations occupied most of the
    management team’s time and attention
    As this is being written, we still believe the tax-exempt market is attractive, but that can change quickly, and good
    opportunities can be difficult to find even when we like the market. Thus, it is difficult to say whether allocations to tax exempts
    will increase or decrease.
    Our current allocation to commercial mortgage-backed securities (CMBS) (8.40%) was put in place after bringing on a
    Commercial Real Estate Credit specialist with fifteen years of experience.
    As a total return bond fund, we seek to position ourselves in the most undervalued fixed-income securities we can find
    consistent with the need for proper diversification and liquidity. To identify such opportunities, we find scenario analysis
    (over roughly a three-year investment horizon) to be more valuable than rate or market forecasting
  • Don't do anything because you'll inevitably be wrong, try to correct your mistake and be wrong again, getting whipsawed. Keep a long-term perspective.
  • Here's a link to a topic I discussed earlier this morning about the sudden love affair with floating rate funds being a panacea for rising rates
  • Vanguard needs to start a floating rate fund, that's what. No sudden love affair. I've been having affair on behalf of my in-laws at TRP, and with Doubleline in my IRA for long time.
  • mcmarasco said:

    I was caught off-guard a little bit by the accelerated rise in the 10-year.

    That should not have happened

  • edited November 2016
    @DH: What's the point? The spike in rates is probably the most forecast (overly-forecast) financial event of the past decade, if not longer.

    It's been badgered to death here and elsewhere. Written about. Argued over dozens of times. Hell, I remember similar warnings and discussions back in the days of Fund Alarm. And ya know what? Rates kept falling.

    So to say someone should have seen last week's sudden turn coming is a bit disingenuous.
  • hank is correct, of course.
  • Thanks again everyone for your thoughts and opinions!!

    DH, I have to agree with Hank; I'm not sure why you believe I and others should known that the 10-year was going to rise from 1.78 to 2.24 in just a handful of days, now. I'm not surprised rates are moving up; just the recent velocity.

    Junkster, Thanks for the articles (I could not get to the Barron's article though). The Lord Abbett article seems to make the case for "diversifying" your portfolio with BL. As they also offer "attractive income" in a variety of interest rate environments and attractive risk-adjusted returns. Agreed, I do not think they are a "panacea" for higher rates, just another alternative.

    In fact, the article appears to endorse, "this may be the time to invest" in BL. Did I misinterpret the conclusion?

    JoJo26, thank you for your advice and thoughts. In general, I agree with you 100%; I'm not making wholesale changes or moving every bond holding to BL, just diversifying a bit because I'm beginning to believe the guru's that claim the decade's-long bull market may be coming to an end, albeit, hopefully slowly. We may just be "normalizing", whatever that means.

    Please keep the discussion going! Matt
  • Just a comment that we track about 85 fixed-income funds and ETFs. Of that, only 20 are positive for the last three months. And only 8 are up more than 1%. My observation is that investors should be in relatively short durations, since with few exceptions any fund with a duration greater than 4-5 is down 2-10% during the last three months. As fears of significantly higher inflation and rates ease, the picture should become clearer, but why take on duration when you can get a 4-5% yield with a duration of less than 1.5? Like others, I am skeptical of the flight to floating rates and am fearful this play could become problematic. We still like OSTIX, LASYX, BSIIX, LLDYX, and PONDX.
  • FWIW, I ran a M* screen on taxable bond funds with duration greater than 4, and found 525 distinct funds (one share class per fund). Of these, over 40% (212) had three month returns greater than -2.0%. That's not to say that one would want to own many of these 212 funds, just that they're not hard to find if one looks at the whole universe of funds.

    Reiterating what I wrote above, what matters is not what's in the rear view mirror, but what one expects going forward. If further changes in rates are moderate (albeit volatile), then one can get modest positive returns going forward without taking on additional credit risk.

    One of those risks is linked with interest risk, because if rates do rise quickly that can be detrimental to businesses and thus trigger defaults. On the other hand rates can rise is response to an improving economy. In that case, risk of defaults goes down.

    Why take on duration risk? Because the higher yield (especially now that rates have risen) can mitigate some of that risk. Following the suggestion of using short duration funds, I ran a second screen for funds yielding over 4% (TTM) having duration under 1.5%. Just 38 funds showed up, of which over half (20) were bank loan funds.

    Five were junk bonds. Most of the rest were "nontraditional", meaning almost anything. There was also one multisector bond - RSIVX. I'm sure several people here can comment on that option.

    Personally, my feeling is that in uncertain times don't just do something, stand there. Especially if you have built a well diversified portfolio.

  • edited November 2016
    Primer on FRs, here. Pretty good roundup, seems like.

    Money quote: "A diverse portfolio of floating-rate loans should perform well when the economy is recovering and credit spreads are tightening."

    Typically, they're not equivalent to junk corporates, as you sometimes hear/read: generally they have lower yields than junk corps, are higher in the capital structure, are backed by collateral, have lower default rates, and have higher recovery rates when they do default. (The Inv'pedia piece doesn't mention lower default rates that I can find, but several other sources I've read cite lower default rates as an advantage over junk corps.)

    They may be overbought now, though, so even a temporary reversal in rates could be a problem. I don't think I'd be buying a significant stake at this point - probably would put new credit-FI $ into a tried and true, more all-weather option like Pimco Income - which pays out a higher yield than FRs now anyway.
  • mcmarasco said:

    DH, I have to agree with Hank; I'm not sure why you believe I and others should known that the 10-year was going to rise from 1.78 to 2.24 in just a handful of days, now. I'm not surprised rates are moving up; just the recent velocity.

    What were you watching before the rise that did not alert you to the rise?

  • As a retiree I want my fixed income to be as risk free and immune to the gyrations of the stock market (and the effects of rising interest rates) as possible in order to act as a counterweight to the risk I am taking in equitities. With bond prices at all time highs and the federal reserve promising to raise rates I dont see many bond options that are likely to achieve these goals. Thus my "bond allocation" is all in cash and a couple government and highly rated corporate bonds which I plan to hold to maturity. Overall yield is miserable but better than the alternative for a retiree, in my opinion.

    As to floating rate funds, I think it is too risky to loan money to companies with bad credit who cannot float conventional bonds, and I wouldnt count on receiving anything in the event of default. I looked at the funds mentioned by Bob C. but three of these are unavailable to me at Charles Schwab, being for "institutional only" (LASYX, BSIIX and LLSYX). For the other 2, it looks like the OSTIX bonds are poor credit and thus too risky for me, and PONDX uses leverage and is thus high risk (see the result for these funds 2008, which could happen again.)

  • msf
    edited November 2016
    @Joe - As noted in the Investopedia page cited by @AndyJ, these bank loan notes have fairly high recovery rates, because they are collateralized and because they are senior to other debt. That doesn't affect the risk of default, but it does mean that you can expect to lose less than "ordinary" junk when they do default. So it is reasonable to count on getting back a good chunk of principal (not interest).

    You can find retail share classes of these funds in Schwab OneSource: LABAX is there, BASIX is offered, and LALDX is open as well.

    Remember, BobC is a professional. Don't try his share classes at home.:-)

    Thanks for the leverage note on PONDX. Its a good fund, well managed. But I remember having taken a look at it and noticing something. I'd forgotten what that something was. Here's a M* thread on the fund's risks (w/contributions by Sam Lee).
  • All of the above illustrates the dilemma of finding a way to wring income out of a sector ( Bonds) that is so overbought. Look what has happened to Munis in the last two weeks.. an entire year's income gone.

    I had a large position in FFHRX in May 2015 after which it lost 9% in the next nine months, souring me on BL funds for a while

    Kiplinger's Income Newsletter portfolio ( widely diversified with MLPs, Taxable and Muni Bond Funds, Dividend stocks) has had an income return of about 16 % since 1/1/2014 (about 6% a year) but the principal has declined 5% in that time so a retiree would see their nest egg shrink (and it was far worse in March before the current rebound in energy!)

    A quick M* chart from May 2015 to March 2016 of some of the above funds shows losses of up to 8% ( RSIVX ), and of course those funds with the higher yields lost the most. PONDX somehow sailed right thru, but the leverage is a huge concern.

    No one has mentioned ZEOIX which held up nicely but still pays 2.4% . Maybe better to accept a lower income stream (if you can) than to see your money melt away as rates rise.

    There is no such thing as a free lunch

  • LALBAX and BASIX heavily leveraged and too risky for this retiree's hardearned money. LALDX yield barely above that of a CD. Unless anyone else has a better idea I am sticking with cash, cd's and a few government or high quality bonds held to maturity. For now.
  • edited November 2016
    Joe said:

    As a retiree I want my fixed income to be as risk free and immune to the gyrations of the stock market (and the effects of rising interest rates) as possible in order to act as a counterweight to the risk I am taking in equitities.

    Joe, sounds like cash is the non-equity asset for you, pretty much all the time, if you want to avoid both credit and interest rate risk, well except for individual Treasuries and munis held to maturity. Rate-sensitive FI is traditionally the best bond counterweight to stocks; cash will for sure dampen total portfolio losses when equities dive, but it's not really a counterweight, if by that you mean a negatively correlated asset.
  • Joe said:

    As a retiree I want my fixed income to be as risk free and immune to the gyrations of the stock market (and the effects of rising interest rates) as possible in order to act as a counterweight to the risk I am taking in equitities.

    Take a look at emerging markets high yield funds. The US$ is at a multiyear high so these funds have taken a hit and will do well when the US$ weakens. Until then you will get a good interest rate.
  • Speaking of the US $$$..
    Jeffery Gundlach in Tue's Webcast did not "pound the table" predicting a higher US $$$$ but stated it would not surprise him to see 120 in the next two years...Also,"don't over analyse" and "keep your seatbelts fastened" Earlier he said he was not interested in becoming US effect saying " I want to remain brutally honest and politicians are seldom if ever that. ." Closed End Fund Webcast Nov 8th
    BUSINESS NEWS | Thu Nov 17, 2016 | 10:56pm EST By Hideyuki Sano | TOKYO Reuters
    Rising U.S. yields help dollar to 13-1/2 year high
    ..rising U.S. bond yields carried the dollar to a more than 13-1/2 year high against a
    basket of major currencies, fueled by expectations that President-elect Donald Trump's policies will lead to higher interest rates.
    The dollar's index against a basket of six major currencies rose above its "double top" touched in March and December of 2015. The index now stands at its highest level since April 2003. "Double top" is a technical analysis term describing a currency (or other liquid asset) rising to a high, falling, and then rising again to the same level. Breaking the double top is often seen as a bullish sign by technical analysts.

    A rising dollar is particularly a problem for some emerging economies that could see capital outflows if investors shift more funds to the United States.
  • DH, Obviously what I was watching was not correct or I misinterpreted it. I think the better question is, what were you looking at? I am not an overly sophisticated investor, so if you could enlighten me, I would greatly appreciate it.

    I do not want to get caught off-guard again. You can bet there will be another leg-up or two in the coming year, but when?

    Thanks for sharing!!
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