https://www.columbiathreadneedleus.com/blog/as-interest-rates-rise-investors-look-to-floating-rate-fundsA informative article on the performance of floating rate/bank loan funds in various rate environments since 1993. YTD they have been the place to be in Bondland with many having returns nearing 6%. One major caveat is if there is another leg down in the regional banks. Bank loan funds took a hit back in March amid the carnage in regional banks. Another caveat is defaults are beginning to spike with some pundits predicting double digit default rates by mid 2024.
Is the best over for this category? One plus is in spite of their stellar YTD performance there has been something like 18 consecutive weeks of fund outflows. Presently their current run have many overbought on the weekly RSI. I imagine tomorrow’s inflation data and Wednesday’s Fedspeak will ……..
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"I would just note that Floating Rate/Bank Loan category of bond funds, has been doing pretty well this calendar year. I continue to maintain a watchlist of about a dozen funds in the FR/BL category, and everyone of them has positive performance for one week, one month, 3 months, and YTD. The FR/BL category has historically performed well in Flat and Rising Rate Markets, TR performance has a positive trend this year, and rates do not seem likely to fall anytime soon."
"There is always a risk/reward decision to be made in investing in bond oefs. FR/BL did very well for many years, in the last 10 years, when rates were flat and certainly not rising. As a junk bond category, (most BLs are B rated), I frequently used them in the past, as a "lower risk" option for junk bond investing. When I read the Feds intentions regarding rates, I am not struck with the impression that a rate drop, is very likely this calendar year. On the contrary, I see the Feds raising rates very gradually the rest of the year, and trying to find their happy place for a smooth landing, and trying to keep inflation under control."
"I have a watchlist of about a dozen BL/FR funds. Everyone of them are positive for 1 week, 1 month, 3 month, and YTD. "If" I choose to put some money to work in this category, I would consider some of the lower risk options (according to SD and M*). A few examples include PRFRX, SAMBX, MWFLX, etc. TRowe Price PRFRX has a SD of 3.76, an M* Risk Rating of Below Average, TR of one week of .72/one month of .78/3 month of 1.26/YTD of 4.59. Metropolitan West MWFLX has a SD of 3.56, M* Risk Rating of Low, TR of one week of.60/1 month of .79/3 month of 1.77/YTD of 4.94."
From: Wealthfront White Paper
My caution with FR/BL is just going forward. It has been a good time for FR/BL from mid-2022 to ??? If one has them, hold for now; may be still good for a quick trade. Things do change rapidly for them and lot of backward-looking data don't capture that. FWIW, when things do turn ugly, FR/BL holder don't know what hit them.
If I search by Sharpe(similar to risk-adjusted performance), OOSAX comes as number one. This is a unique fund with more foreign bonds than the US. SD=3.89.
PRFRX+MWFLX are good choices with a bit lower SD than OOSAX.
For momo seekers, one month's performance is...OOSAX=1.76%...PRFRX=0.98%...MWFLX=0.77%
As for one month momentum be careful. Bank loan funds are notorious for what is best one month will lag the next. Same with junk bonds. A case in point FAFRX which was a one month momentum play last month and discussed in another forum has seriously lagged this past month.
WABAC, the only fund I have used instead of MM/CD YTD, was RPHIX. I don't trust any other funds.
But what keeps catching my eye are the close to double-digit yields. Sticking with FFRHX, the 30 day yield is 9.55% (Distribution yield daily is 8.27%) per Fido. High risk, but also decent potential long-term compensation (yield). Is this the definition of "reaching for yield"?
I suppose that if you are a trader, it's a bit late to get on board. But for long-term investors pondering an entry point....do you really wait for the next oscillation down? There might not be one if the Fed pauses and then decides to stop raising rates altogether.
In 2008, Bank Loan Funds lost approx. -30% on average. The waves can be large.
Lastly, I would rather collect close to 5% in Money Markets funds than buy RPHIX. Not a fan, used to own the fund when interest rates were nil.
I still have a high cash allocation in T bills, CDs, money market, and stable value. It is the sticky inflation (4%) that erode the 5% yield of the cash equivalents. As these cash equivalents mature every month, I will reinvest them in bond funds.
The second part intends to be hawkish to cover their a$$. What matters is actual which was NO CHANGE.
Looking at the 10 year treasury chart for 7 months shows that several times it got to around 3.8-4% and backed off.
BTW, the volatility table per category is deceiving. We have learned since 2020 that volatility is unpredictable in market meltdowns. Sometimes the indexes which trade during the day show more volatility.
Ken Griffin, whose hedge fund churned out a record $16 billion for clients last year, is increasing his focus on credit trading as he braces for a potential US recession.
“We’re much more cautious about 2024,” the billionaire founder of Citadel said in an interview in Hong Kong, adding that the world’s largest economy is unlikely to avoid a downturn that year. “We’ll look at the credit markets as a source of opportunity. Credit should be a meaningful contributor later this year” and next for Citadel, he said.
Griffin said his hedge fund is particularly focused on the high-yield credit market, with a mixture of long and short strategies. He expects the Federal Reserve to raise interest rates once more this year and then pause hikes for an extended period of time.
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I think that the discussion on this thread is related to FR/BL-junk and its nature, depending on the rates, is that it shows low SDs for a while, and then unexpectedly, the SD becomes high.
FR/BL is a special category of HY. So, a bigger question is, if one avoids HY, should one jump into FR/BL?
My suggestion and what I do depending on the environment is trade hybrid junk bond funds. Meaning they have a 20% to 30%+ allotment to bank loans with the rest in junk corporates. It tampers down the volatility a bit. Being the superstitious type seeing this thread ( yes, I know I started it) and how overbought bank loans are presently makes me nervous.
Edit: By the way, MBS bond funds offer a lot of value based on how they are trading in relation to Treasuries. Many are having a stellar year.
Interesting comment from a diehard trader. Probably wise for others to be "nervous" as well! Reminds me of why I am not a good trader and choose lower risk options, when they are available.