How Much Will 'Floating Rate' Funds Really Float?

PatShuff

But about two years ago, bank loans began to include "Libor floors," or minimum levels at which their income payments begin ratcheting upward if interest rates rise. According to Robert Polenberg of Standard & Poor's Leveraged Commentary & Data, 40% of existing bank loans have Libor floors, with the level averaging 1.59%. Virtually 100% of newly issued loans, says Mr. Polenberg, include them.

David Allison of Allison Investment Management in Columbia, S.C., points out that charts of past performance showing these funds performing well when rates went up are based on periods before Libor floors were common.

http://online.wsj.com/article/SB10001424052702304453304576391900432920670.html#printMode

catch22

Howdy Pat,

Thank you for your time with this and the posting.
I continue to look at LIBOR on a casual basis of once a week; and I also watch Euribor, too.
Since the large intervention of Federal monies after the market melt, LIBOR has remained in a very tight range.

Take care,
Catch

msf

Interesting. To see possible impact, I suggest researching ARM (Adjustable Rate Mtg) funds - these were big in the 90s, and most fizzled. They floated, but slowly - since ARMs typically adjust annually, and even when they adjust, many have caps on how much the rate can change in a single adjustment.

http://articles.baltimoresun.com/1992-02-02/business/1992033087_1_adjustable-rate-adjustable-rate-funds
(1992 article talking about the adjustment lag)

http://articles.sfgate.com/1995-03-20/business/17800348_1_government-fund-mutual-fund-fund-s-assets
(1995 article about T. Rowe Price changing the mandate of its ARM fund, and giving ARM market returns for 1992-1994 - the last year being 0.01%)

PatShuff

Holding Fidelity Floating Rate FFHRX. I'd anticipated the launching of several investment grade floating ETFs to up the credit quality of dealing with interest rate risk. Turns out their yield is under 1% so passed on them. Instead reallocated to some market neutral/long short/absolute return income funds from Doubleline, Rivernorth and Loomis. Pretty stable valuations so far, their performance in a rising interest rate environment remains to be seen. In a yield hungry world it's hard to see interest rates going much if any lower while having ample room to rise. And rise.
So repositioned bond holdings accordingly earlier in the year including Fidelity's shortest term munifund when they sold off. Count me a head-scratching bond bear
with 70% of assets decidedly not stocks and now decidely not exactly bonds either.
Someone has to be targeted to pay for this mess and is, with low risk yields around zero dot zero.

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Old_Joe

Damn straight on that one, Maurice!

Investor

I've read recently that recent issues of Floating Rate/Bank Loan notes/bonds etc. have worse covenants (i.e. more favorable to the issuer) than the earlier ones. In other words, the investor protections also eased a bit.