U.S. Markets closed

Senior Loan Funds' Low Interest-Rate Risk, Enticing Yields Come With Risks

Phillip Yoo, CAIA (Phillip.Yoo@morningstar.com)

In today's rising-interest-rate environment, senior loan funds' low-interest-rate risk and enticing yields have made them alluring. Senior loans' yields go up in lock step with short-term interest rates, offering an effective duration hedge, but they come with significant credit risks, as most of these loans are issued by companies rated below investment grade. Since 2010, their credit risk has gradually crept up.