What are a floating rate and a spread?

On each reset date, often every quarter, the rate for the next period is set from the benchmark at that time, while the spread stays as agreed. SOFR, published by the Federal Reserve Bank of New York, measures the cost of borrowing cash overnight against Treasury securities. The growth of private credit has shifted many companies’ debt toward floating-rate loans, so rate changes reach those borrowers faster than fixed-rate debt, which changes only when it is refinanced.

Say a loan is priced at the benchmark plus 5 percentage points. With the benchmark at 4%, the borrower pays 9%; if the benchmark is 3% at the next reset, it pays 8%. Simple example. Terms vary by fund.

Lenders’ income rises and falls with interest rates, and so does the strain on borrowers, because a rise reaches their interest bills quickly.