Interest Rate effects to PCI (Perpetual Credit Income)

Hi Jack,

Great question. PCI holds floating rate securities, and the income generated off the assets held will come down as interest rates come down, however the capital values will not change for that reason. The thing that drives capital values in floating rate securities is the spread, or the risk margin over and above safe government bonds. If the perception is that credit markets are becoming more risky – which could be argued has happened in the past 24-48 hours, then spreads will widen, and the capital value may decline.

A fixed rate bond/bond fund on the other hand will see capital values decline if rates go up, and capital values go up if rates come down. We hold the PCI because they hold higher quality, more vanilla fixed income assets, use external ratings etc., and the target of cash +3.25% is a high probability.

The other important point here, is that bond markets are forward looking – they have already priced in cuts – now a full 1% in the US. Additionally, if rates come down, the margin as a proportion of their total return increases, which makes it relatively more attractive – like Hybrids back when rates were near zero.

Net/net, lower interest   rates will not have a big influence on the capital value, even though the total return we should expect will fall.

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Perpetual Credit Income Trust (PCI)

LAST UPDATED 02/08/2024 21:03

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Perpetual Credit Income Trust (PCI)

LAST UPDATED 02/08/2024 21:03