Predicting the path of interest rates is notoriously difficult, and historical data indicate that the fed fund’s actual rate path and the market’s expectations have not been aligned, as shown in the chart below. Still, investors pay very close attention to forward pricing as well as strategists’ rate calls, despite the fact that these forecasts can fluctuate quite a bit.

Figure 1: Fed funds futures are poor predictors of the policy path (Fed funds rate, %: actual rate (blue) and historic forward pricing (yellow))

Source: New York Life Investments Global Market Strategy, Federal Reserve Bank of New York, CME Group, Macrobond, March 2024.


Historically, floating-rate loans typically come into favor where there is anticipation of Fed rate hikes. Loan coupons have two components — a fixed spread and a floating-rate reference rate, which is closely tied to fed funds. As fed funds increase, so too do loan coupons. Because of its floating-rate nature, the asset class attracts market timers — those that seek to enter when rate hikes are set to commence and exit before the Fed pauses. Of course, timing markets and making bets on macroeconomic trends is very difficult. In fact, after five quarters of significant inflows, money started to leave the asset class during the second quarter of 2022. At the same time, longer-duration Morningstar categories such as Long Government saw massive inflows. In the two years since, floating-rate loans outperformed core bonds by over 1800 bps and long-duration U.S. Treasuries by close to 4000 bps.

Figure 2: Loans have greatly outperformed longer-duration bonds since flows turned negative

Source: FactSet 4/1/22 – 3/31/24. Floating-Rate Loans represented by Morningstar LSTA US LL Index TR USD. An investment cannot be made directly into an index. Past performance is not a guarantee of future results.


Here is why “conventional wisdom” regarding timing the loan market has failed investors. Loan funds were taking in tremendous assets in 2021 when market yields were 4%. Outflows accelerated throughout 2022 at the same time when yields were increasing — in fact, by the end of 2022, the average market coupon reached 8%. More importantly, 2022 was one of the worst bond markets in history, and the loan market proved remarkably resilient losing just 77 bps compared with the Bloomberg Aggregate Index, which declined 13%.

Figure 3: Loan coupons have increased with fed funds

Source: Credit Suisse, Bloomberg 10/1/13 – 3/31/24. Coupons are calculated by adding a fixed spread to a floating reference rate - typically LIBOR or SOFR. Past performance is no guarantee of future results, which will vary.  It is not possible to invest directly in an index.


Average market coupon surpassed 9% in 2023 and have remained at that level in 2024 with the Fed on hold. Current market dynamics are proving in real time that exiting the asset class before rates peak may not be the best approach. With the Fed on hold, the floating rate asset class currently offers high levels of income potential — which leads to the inevitable question — “What about when the Fed does start cutting?” A valid question. First, the “when” and “by what magnitude” do not have very clear answers and keep changing as new economic data are released. Second, the “why” is just as important as those other questions. If the Fed cuts quickly and sharply in response to some unforeseen event, loans may indeed underperform, as all risk assets including stocks would likely sell off. However, more gradual rate cuts to get back to the “neutral” level may not be a clear signal to exit the asset class. In this situation, we believe the market coupon would decrease, but so would yields across fixed income. At that point, it becomes a relative value decision — “Am I being compensated for the level of risk in the market?”

Figure 4: Q1 2024 Fixed-income performance

Source: FactSet 3/31/24. Source: Factset 3/31/24. Floating Rate Loans represented by Morningstar LSTA US LL Index TR USD. US High Yield represented by ICE BofA US HY Constnd TR USD. US IG Corps represented by Ice BofA US Corp TR USD. Core bonds represented by Bloomberg US Agg Bond TR USD.  An investment cannot be made directly into an index.  Past performance is not a guarantee of future results.

Strong loan performance has continued into 2024, as the asset class returned almost 2.5% in the first quarter, outperforming both high yield and core bonds, which returned approximately 1.5% and -0.8%, respectively. Despite challenges in the economy, the loan default rate is a manageable 3.5%1 lower than where many expected it to be 15 months ago.

Given stubbornly high inflation and a more likely “higher-for-longer” rate environment, we believe floating-rate loans have the potential to continue to generate high levels of income. Perhaps more importantly, the last few years have demonstrated a loan allocation strategy predicated upon accurately timing Fed rate policy is ineffective and outdated. A better approach may be incorporating a strategic allocation to the asset class as part of a well-diversified fixed-income portfolio.

1. JP Morgan April 2024. LTM default rate includes defaults from the prior 12 months as of April 1 2024.



The Morningstar LSTA US Leveraged Loan Index is designed to deliver comprehensive, precise coverage of the US leveraged loan market.

The ICE BofA U.S. High Yield Index is an unmanaged index that tracks the performance of U.S. dollar denominated, below investment-grade rated corporate debt publicly issued in the U.S. domestic market.

The ICE BofA US Corporate TR USD Index tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.

The Bloomberg US Agg Bond TR USD is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

The London Interbank Offered Rate, or LIBOR, is the interest rate used by major banks in the market for short-term loans.

The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.


About Risk

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity. Interest income on these securities is exempt from state and local taxes.

Bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner, or that negative perception of the issuer's ability to make such payments may cause the price of that bond to decline.

Floating-rate funds are generally considered to have speculative characteristics that involve default risk of principal and interest, collateral impairment, non-diversification, borrower industry concentration and limited liquidity.

Investing in below-investment-grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These securities can also be subject to greater price volatility. Diversification cannot assure a profit or protect against loss in a declining market.

Important Disclosures

This material contains the opinions of its authors but not necessarily those of New York Life Investments or its affiliates. It is distributed for informational purposes only and is not intended to constitute the giving of advice or the making of any recommendation to purchase a product. The opinions expressed herein are subject to change without notice. The investments or strategies presented are not appropriate for every investor and do not take into account the investment objectives or financial needs of particular investors.

This material represents an assessment of the market environment as at a specific date, is subject to change, and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any particular issuer/ security. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. Securities are distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.

By subscribing you are consenting to receive personalized online advertisements from New York Life Investments.