The Search for Higher Yields

Senior Floating Rate Loans Can Provide Attractive Income in Differing Interest Rate Environments

Floating rate bank loans offer the potential for higher yields, a degree of inflation protection and fixed-income diversification. These bonds, which are issued by banks, behave differently than many other fixed-income investments. Their yields actually reset based on short-term interest rates, providing a degree of protection if rates increase.

Why Senior Floating Rate Loans Today?

U.S. Treasury yields have continued to drop despite a debt crisis and a downgrade in U.S. Treasury ratings, as investors flock to lower-risk, higher-quality bonds. Eventually, this trend may reverse and global interest rates should cycle upward. Adding a degree of inflation protection may be an important strategy to balance out the bond portion of your investment portfolio.

Interest rate risk, or what is called duration risk, can have a significant impact on traditional fixed-income assets. For example, a typical 10-year Treasury has a duration of about 7 years. This means that if interest rates increase by 1% (for example, from 2% to 3%), the price of the bond will decline by 7%, eroding what could be more than two years of income.

Senior floating rate investments can offer the potential for rising income without corresponding price declines. Should interest rates eventually rise from today's historically low levels, the prices of other bond investments will tend to move lower, while floating rate bonds actually stand to benefit with both higher yields and potentially higher prices.

Learn more about the AIG Senior Floating Rate Fund.

Senior floating rate funds are not money market funds; their NAVs will fluctuate and may lose value. Investment in these loans involves certain risks, including among others: risks of nonpayment of principal and interest; collateral impairment; non-diversification and borrower industry concentration; and lack of full liquidity. High yield debt instruments carry a greater default risk and may be more volatile, less liquid, more difficult to value and more susceptible to adverse economic conditions or investor perceptions than other debt instruments.