Short-term interest rates have come down, but floating-rate or bank loans, which carry interest rates that reset in line with a short-term benchmark, still sport robust yields. The yield on the typical bank-loan fund, 7.4%, topped every other bond fund category at the end of 2024, according to data firm Morningstar.
T. Rowe Price Floating Rate (PRFRX), our favorite bank loan fund and a Kiplinger 25 member since 2022, yields 7.2%. "The coupon rate on bank loans has never been higher," says fund manager Paul Massaro. "That leaves a cushion for bank loans to endure even more Fed cuts and still deliver high income."
Over the past 12 months, Price Floating Rate has gained 8.7%, outpacing 67% of its peers. By contrast, the Bloomberg U.S. Aggregate Bond index returned 1.3%.
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In truth, bank loans can do well whether interest rates are rising or falling, within parameters. When rates are rising (and bond prices, which move in the opposite direction, are falling), these securities typically hold up better than the broad bond market because their interest payments adjust upward, too. In 2022, the Fed raised rates four times, and the typical bank loan fund lost 2.5% – but the Bloomberg U.S. Aggregate Bond Index fell 13% (Price Floating Rate lost 0.7%).
When interest rates fall, bank loans don’t necessarily sour, as long as the cuts aren’t draconian and the result of a struggling economy. Despite the Federal Reserve's one-percentage-point cut in short-term rates in 2024, for example, bank loans still beat "almost everything in fixed income," says Massaro. As long as the pace of rate cuts remains modest in 2025, he adds, Price Floating Rate should perform relatively well.
Massaro and his team of analysts dive deep to find quality loans trading at a discount. Over the past decade, the fund's annualized return of 4.7% beat 85% of its peers.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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