EC Three ETFs For Floating Rate Bank Loans

Does it seem like interest rates have trebled over the last two years? Well, short-term commercial lending rates certainly have. A quick glance at a chart of three-month London Interbank Offered Rate (Libor) tells the tale. Since June 2015, the U.S.-dollar rate has climbed from 28 basis points to 131 basis points.

In the meantime, a lot of fixed-income investors have suffered a bad case of the interest rate jitters. Bond prices, especially at the long end of the yield curve, have been extremely volatile. The standard deviation for the iShares 20+ Year Treasury Bond ETF (NYSE Arca: TLT) share price is now a very stock- like 12.9 percent. Even paper with middling durations, say at the five- to seven-year level, have been whipsawed. The iShares Core Aggregate Bond Index ETF (NYSE Arca: AGG) has bronco bucked in a $6 range since the summer of 2015. And for what? AGG’s share price is now at the same level as it was two years ago. And the high-yield market? Even more volatile. The iShares iBoxx High Yield Corporate Bond ETF (NYSE Arca: HYG) share price wobbles at twice the rate of AGG (see Chart 1).

The reason for the volatility? Inflationary expectations -- now moderating -- which ballooned in the aftermath of the U.S. presidential election. Short maturities like Libor aren’t influenced so much by inflationary expectations. Liquidity – meaning money supply – holds more sway at that end of the yield curve.

You’d think the folks who bought floating rate notes and funds a couple of years ago would be tickled by Libor’s climb. Especially those that bought those high-yield notes known as senior bank loans. Why? Because the interest due on most bank loans is specifically keyed to the three-month Libor rate.

Let’s not get a head of ourselves, though. Perhaps a little primer on senior bank loans is in order.  After all, it’s been more than a year since we last covered floating rate instruments in “Floating Rate ETFs In Flux” here at Wealthmanagement.com.

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Disclosure: Brad Zigler pens Wealthmanagement.com's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) option ...

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