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Bank Loan Funds Could Soon Benefit From Rising Rates

With $2 billion in flows over the past three months, investors have noticed that rates are approaching the level where many bank loan funds will adjust their payments upward.

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Brian Moriarty: In August and September, my colleague Sumit Desai spent some time highlighting bank loan funds, and I wanted to follow up on his work. As he noted, bank loans are positioned to benefit from a rising rate environment, but I wanted to spend more time on the unique aspects of this asset class.

The income paid by bank loans is linked to short-term LIBOR rates, usually between 30 and 90 days depending on the loan. When LIBOR moves up and down, the income paid by the loans moves with it. However, over 90% of loans have a LIBOR floor of 1%. The income adjustments won't go into effect until LIBOR breaks through the 1% barrier.

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