Investors bet on loans as Fed readies to lift interest rates

The Financial Times recently describe some of the impact that an expected rise in interest rates by the Federal Reserve in 2022 is having in the market for US loans. 

“I think we may have reached the inflection point. The question is no longer ‘if’ rates will go higher, but ‘how soon and by how much’,” said Jeff Bakalar, group head of leveraged credit at Voya Investment Management. “Every time this has happened, the loan market has become a safe harbour.”

Also, as some Citigroup analysts commented, “Loans provide two much-needed characteristics for investors in 2022 — rate protection and relatively stable performance.”

Here is a broad overview of the weekly flow of money chasing US loan funds:

The article, however, fails to mention both sides of the equation in terms of determining overall profitability. Indeed, an investor in a US loan fund would benefit from a rise in interest rates, presumably because those loans would reprise higher and thus distribute higher cashflows. However, a tight monetary policy would have an effect of cooling of the economy, which increases the risk in some firms to go bankrupt or reduce economic profits, which would ultimately reduce the value of certain funds.