16 Sep Market Insight – ‘More Tailwinds for Senior Loans?’
Voya Perspectives – Market Series
An increase in short-term interest rates typically translates to a pick-up in yield for senior loan portfolios. As a result, investors have always paid much attention to the actions of the U.S. Federal Reserve (the “Fed”) and movements in LIBOR, the base rate over which loan spreads float. In fact, LIBOR and the fed funds rate have historically had a very tight relationship, with the former typically trading about 25 basis points (bp) above the latter. Recently that has changed, as LIBOR has been moving up, but without any short-term rate changes from the Fed since its first 25 bp lift at the end of 2015. What many investors may not have expected was that, although not as common, other market pressures on short-term commercial paper can also impact LIBOR and, ultimately, the yield they receive from investing in senior loans.