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CEF Specialist

Libor to Bank-Loan CEFs: Float On

Bank-loan CEFs may finally offer long-promised floating coupons.

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With the U.S. election in the rearview mirror, the biggest question on investors' minds is when the Federal Reserve will raise rates again (it did so in December 2015, increasing its target rate by 25 basis points). According to the CME's FedWatch, as of early November, the market assigned a 76% probability to a 25- to 50-basis-point hike in December, which would move the target federal-funds rate to 50-75 basis points from 25-50 basis points.

For closed-end funds, rising rates are generally bad news, especially for fixed-income funds. This is primarily because most CEFs tend to have long durations. Because of the closed nature of the funds, managers can capture the illiquidity premiums on long-term bonds, increasing payouts to investors but lengthening duration as well. In addition, most CEFs utilize leverage, which increases the underlying portfolio's duration.

Cara Esser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.