On February 22, 2017, we had a conference call with the Virtus Asset Management Team regarding bank / floating rate loans. While our current position is held with the Columbia Floating Rate fund, we always find it is good to hear what other management teams are saying about the space. Here are some highlights from the call:

  • We are now in a period where rates are no longer declining.
  • Bond durations are being extended but we are still in an extremely low yield environment.
  • Currently there is about $8-$9 Trillion of bonds outstanding that contain negative interest rates.
  • They believe that non-investment grade U.S. bonds are attractive and they are finding the risk / reward scenarios to be better.
  • From a 50,000 foot view the market continues to remain positive and stimulative.  The potential for de-regulation, infrastructure spending and tax reform should all bode well for interest rates to continue to rise.
  • Proposed Fiscal policy should be skewed toward seeing inflationary pressures on the rise.
  • Floating rate bonds are great for a rising interest rate environment as when interest rates rise, so do the yields on these types of bonds.  You have some protections against both inflation and rising rates.
  • Virtus is seeing much better liquidity in the floating rate environment today compared to back in 2008-2012.  However, now that banks no longer have proprietary trading desks, if liquidity should dry up, these types of bonds could be the first to be problematic.

Regarding liquidity, we did follow up with Columbia to discuss how they would handle any sort of increased liquidations should liquidity in the floating rate space to become a concern.  As with most of the funds in this space, they have a line of credit that can be tapped into rather than having to sell off assets at fire sale prices.  We continue to believe this is a solid asset class to maintain in portfolios during this potentially lengthy rising rate environment.