“Rising interest rate cycles are supportive of senior loans because these loans offer a floating rate coupon that resets every three months. Add this to their seniority in the capital structure and the drawdowns in the most recent sell-off were not as severe,” according to SSgA.
Additionally, senior loans come with significant liquidity risks – senior loans do not come with a maximum settlement period, which may cause trouble for funds that try to redeem senior loans during more volatile periods. Fund providers, though, may stick to more liquid segments of the senior loan market and hold cash to help offset this risk.
For more information on floating rates, visit our floating rate notes category.