Bond Fund Spotlight: T. Rowe Price Institutional Floating Rate Fund [PFFRX]
By: Ted Black, CFP©
Summer 2021 (Vol. 39, No. 2)
The market for Government and Corporate bonds is absolutely enormous. Supply and demand for bonds across the risk spectrum is fluid and reflects “The Bond Market’s” stance on current and prospective economic conditions. If institutional and retail investors are optimistic about conditions and willing to take on more risk by selling bonds and buying stocks, this puts upward pressure on interest rates. If the reverse is true and investors are looking to reduce risk, then this can cause rates to fall. All this of course is set within a general interest rate environment established by the Federal Reserve Board.
Within this massive market, particular attention is paid to the yield on the 10-year U. S. Treasury Note. Its current yield is seen as a benchmark from which many consumer and commercial loan rates are based. As of this writing, the current yield on the 10-year U.S. Treasury is right about 1.30%. Other than the onset of the COVID-19 pandemic period of fear, panic and uncertainty, this is very near the lowest yield in its history.
The popular narrative of late is that economic growth has been strong and will remain so for at least the near term, and that disruptions in the supply chain won’t be fixed overnight. These conditions combined can cause inflation to heat up … and it has. The Fed’s primary tool to help keep inflation under control is the interest rate on the Federal Funds rate. If the Fed wants to taper economic growth and inflation, it raises rates, and vice-versa. Although there doesn’t seem to be hurry to get there, and the Delta variant of COVID-19 has thrown a bit of a wrench into things, the path toward at least slightly higher rates seems almost inevitable.
With this in mind, I think it’s worth considering the T. Rowe Price Institutional Floating Rate Fund – F Class (PFFRX). This fund can be used as an addition to a core bond fund holding, or perhaps if you have some money you want to put to work that earns more than a savings account or money market, but don’t want to take on too much risk. Floating Rate funds, also called Bank Loan funds, are mutual funds that buy loans made by banks or other financial institutions to companies that pay interest based on a floating rate. As its name implies, a floating rate is not fixed, but rather a rate that adjusts periodically based on a publicly available, short-term referenced interest rate such as the U.S. Prime Rate. This being the case, rising interest rates can potentially be beneficial to both the current yield and underlying share price of these funds.
Bank loans are usually senior secured debt and are mostly rated below investment grade because the borrower’s ability to repay may be viewed as speculative. Such loans are used for general corporate purposes as well as to refinance debt and fund acquisitions, leveraged buyouts or recapitalizations. In an effort to manage risk, the fund is broadly diversified across 200 - 300 different issuers, with strict exposure limits.
This fund pays dividends on a monthly basis, and currently has an annualized yield of 3.76%. The lead manager of the fund is Paul Massaro, who has been with T. Rowe Price since 2003 and at the helm of this fund since 2009. With all share classes combined, the fund has in excess of $5 billion under management.
If you’d like to discuss this further, or would like a portfolio review to determine if this fund might be appropriate for your portfolio, please call Ted Black, CFP© at 888-878-0001, extension 3.
Performance annualized and updated through 06/30/2021: 1-Year: +9.54%; 3-Year: +4.09%; 5-Year: +4.32%. The gross annual expense ratio is 0.70%.
Statistics and information provided by Morningstar and T. Rowe Price. Please visit the T. Rowe Price website at www.troweprice.com for the most recent performance information. The principal value and investment return will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Returns shown, unless otherwise indicated, are total returns, including any capital gains or losses and all dividend and capital gains distributions. The performance data quoted represents past performance and in no way guarantees future results. Mutual funds are not FDIC insured.
Mutual funds are sold by prospectus. An investor should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. Please go to www.troweprice.com or contact our office at 888-878-0001 to obtain a prospectus. Please read the prospectus carefully before you invest or send money. Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.