Short-term interest rates have come down, but floating-rate or bank loans, which carry interest rates that reset in line with a short-term benchmark, still sport robust yields. The yield on the typical bank-loan fund, 7.4%, topped every other bond fund category at the end of 2024, according to data firm Morningstar.
T. Rowe Price Floating Rate (PRFRX), our favorite bank loan fund and a Kiplinger 25 member since 2022, yields 7.2%. "The coupon rate on bank loans has never been higher," says fund manager Paul Massaro. "That leaves a cushion for bank loans to endure even more Fed cuts and still deliver high income."
Over the past 12 months, Price Floating Rate has gained 8.7%, outpacing 67% of its peers. By contrast, the Bloomberg U.S. Aggregate Bond index returned 1.3%.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In truth, bank loans can do well whether interest rates are rising or falling, within parameters. When rates are rising (and bond prices, which move in the opposite direction, are falling), these securities typically hold up better than the broad bond market because their interest payments adjust upward, too. In 2022, the Fed raised rates four times, and the typical bank loan fund lost 2.5% – but the Bloomberg U.S. Aggregate Bond Index fell 13% (Price Floating Rate lost 0.7%).
When interest rates fall, bank loans don’t necessarily sour, as long as the cuts aren’t draconian and the result of a struggling economy. Despite the Federal Reserve's one-percentage-point cut in short-term rates in 2024, for example, bank loans still beat "almost everything in fixed income," says Massaro. As long as the pace of rate cuts remains modest in 2025, he adds, Price Floating Rate should perform relatively well.
Massaro and his team of analysts dive deep to find quality loans trading at a discount. Over the past decade, the fund's annualized return of 4.7% beat 85% of its peers.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
-
Adobe Stock's Path to a 100,000% Return Is ImpressiveA little bit of luck and a lot of strategic decision-making has created a massive return for Adobe shareholders.
-
Retire Abroad Where 'The White Lotus' Was FilmedThis lush locale is the perfect setting for 'The White Lotus,' season three. You can retire there peacefully without the hit show's murder and mayhem.
-
Adobe Stock's Path to a 100,000% Return Is Impressive
A little bit of luck and a lot of strategic decision-making has created a massive return for Adobe shareholders.
-
High-Net-Worth Individuals and Estate Planning Under TrumpWe don't know what’s going to happen with taxes. Keeping an eye on these issues is imperative so you can make the appropriate moves at the right time.
-
Preparing for an Inheritance: Don't Let Your Blessing Become a CurseA few practical steps, such as establishing your financial independence and asking questions, can help you avoid inheritance pitfalls.
-
Dealmaking Drives HEICO Stock's 100,000% ReturnHEICO has been skillful with mergers and acquisitions over the years and this has resulted in a 100,000% share-price return.
-
The Golden Window: A Top Tax Strategy for the Right RetireesMaximize your retirement savings and minimize your tax burdens by taking advantage of the strategic 'Golden Window' before Social Security and RMDs begin.
-
Roth or Traditional? Seven Considerations for High EarnersRetirement savings and taxes are a minefield — and the higher your income, the more complicated the options. Use these tips to find your way forward.
-
The Social Security Fairness Act: Good News for Retirees?Millions will be affected by new rules that boost Social Security benefits. But if you qualify, there may be knock-on effects on your retirement cash flow.
-
Stock Market Today: Stocks Recover From Trump-Zelensky SlideReports of a combative meeting between the two leaders sent stocks temporarily lower Friday afternoon.
