Prepare for Fed rate hikes

BofA Merrill Lynch notes:

Prepare for Fed rate hikes We still expect the first Fed rate hike to come in September, with a slight chance that it will be later. 

Despite our belief that short-term rates will soon rise, we do not find a strong case for cash yet. The return on cash is presently close to zero. If we are right that the Fed will raise rates gradually, the returns from cash will not get much better. 

We still suggest senior loans for investors who can accept some credit risk and who do not need the assets for liquidity purposes. We put senior loans into our high yield allocation. 

The principal value on loans will vary with credit conditions. The coupon rate on loans is typically a markup over the higher of the 3-month LIBOR rate or 1%. The LIBOR rate is currently about 0.29%, so it would have to rise by about 0.72 percentage points before the coupon rates on loans began to float higher. 

Based on our forecast for Fed policy, that probably will not happen until well into 2016. We like senior loans because we believe that the present yield of a bit under 4% is enough to be worth the wait.