Low interest rates are great for us as consumers as it makes it easier to make our mortgage payments, car loans and ongoing credit card debt. But it’s not so great when we’re looking for the best return on our investments. Walter Davis has some answers about investing when rates begin to rise.
As I travel across the country meeting with financial advisors and their clients, a common concern I hear voiced is “how can I position my portfolio for when the inevitable happens and interest rates start to rise?” In response, I state that certain types of alternative investments are well suited to help prepare portfolios for rising interest rates in the future, while also potentially adding value in the present.
Specifically, I highlight four different types of alternatives for clients to consider:
- Senior loans (also known as bank loans, senior secured loans and/or leveraged loans) – Senior loans are loans made by banks to non-investment grade companies, commonly in relation to leveraged buyouts, mergers and acquisitions. The loans are called “senior” because they are contractually senior to other debt and equity, and are typically secured by collateral.
Given that the loans are made to non-investment grade companies, the yield associated with them tends to be higher than on investment grade corporate bonds.1 For example, as of the end of May, senior loans were yielding 5.51% versus a yield of 2.99% on investment grade corporate bonds.