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How the Fed’s Rate Announcement Relates to Senior Floating Rate Bank Loans

09/13/2012

The Fed expects to keep short-term interest rates near zero until at least mid-2015. While LIBOR will continue to remain depressed, high credit spreads and LIBOR floors continue to result in attractive dividend yields in bank loan funds relative to other fixed income asset classes.  Roughly 60% of the loan market carries a LIBOR floor, with the average floor around 1.25% (compared to 0.25% for actual 3M LIBOR).The bank loan market is effectively “pulling forward” the eventual rise in interest rates, resulting in a benefit today.

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