Finding credit income that rises with interest rates

4 min read 4 Jul 22

For explanations of the terms used in this article, please visit our glossary

UK interest rates expected to rise

UK inflation continues to hit multi-decade highs, with the consumer price index (CPI) reaching 9.1% in May, driven by spiralling food and energy costs1. To counter this, the Bank of England has begun to raise interest rates in 0.25% increments, with some Monetary Policy Committee members now calling for more aggressive action. For bond investors, this could present challenges, as bond prices typically fall when interest rates rise – and after a decade of ultra-loose monetary policy, many investment portfolios struggle to generate enough income to buffer inflation.

Alternative credit investments can offer variable interest payments

Although the majority of government and corporate bonds pay fixed interest coupons, other types of credit investment may pay variable levels of income. This means the income rises or falls in line with market interest rates, normally based on the Bank of England’s SONIA (Sterling Overnight Index Average) rate or equivalent US and European cash rates.

When interest rates are rising, these credit investments should help to preserve a portfolio’s capital value, while also providing investors with higher income. Such deals are often privately negotiated between large lenders and borrowers, or they may require specialist expertise and resources to analyse, which means they are broadly considered ‘private debt’ or non-standard public debt. Many investors therefore cannot access these deals directly. However, for large, specialist fund managers, they can offer a considerable income premium over corporate bonds with equivalent credit risks.

M&G Credit Income Investment Trust

M&G is one of the UK and Europe’s leading private debt investors, with one of the region’s largest in-house credit research teams, which gives us access to deals unavailable to other asset managers. Historically, our private debt and specialist public debt strategies were primarily available to large institutions, but we have now made these potential opportunities available to individual investors through the M&G Credit Income Investment Trust.

The trust aims to provide an annual dividend of 4% above UK cash rates (SONIA) using a flexible portfolio of public and private debt of overall investment grade credit quality. It is designed for investors who want higher income without the associated increase in volatility in net asset value (NAV) that this may entail, for example, by investing in dividend-paying stocks, real estate or high yield bonds.

With market conditions expected to remain challenging for traditional government and corporate bonds, we believe these variable rate credit investments could offer important diversification for investors seeking regular, rising levels of income in the period ahead.

1 Source: ONS, June 2022

M&G Credit Income Investment Trust: performance

Performance since inception (total return)

NAV total return
(%, p.a.)3
1 month 3 months 6 months YTD 1 year 2 years 3 years Since
M&G Credit Income
Investment Trust
-0.44% -0.78% -1.23% -1.46% -0.13% 4.95% 3.24% 3.38%
Benchmark2 0.41% 1.18% 2.22% 1.87% 4.30% 4.19% 4.08% 3.98%


Calendar year NAV
total return (%, p.a.)3
2021 2020 2019
M&G Credit Income
Investment Trust
4.25% 3.75% 6.04%
Benchmark2 4.09% 4.32% 3.34%


Past performance is not a guide to future performance.

Source:  M&G, 31 May 2022. 23 Month Libor +2.5% from inception to 31/12/2019, 3 Month Libor + 4% from 1st January 2020 to December 2021, thereafter SONIA + 4%. 3The total return calculation assumes that dividends paid to shareholders are reinvested at NAV at the time the shares are quoted ex-dividend. 4Trust inception 14 November 2018.

2Sterling Overnight Index Average (SONIA) is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors.

Risks associated with this Company:

The value of investments will fluctuate, which will cause share prices to fall as well as rise and you may not get back the original amount you invested. There is no guarantee that the Company’s Investment Objective will be achieved.

The Company may be exposed to the possibility that a debtor will not meet its repayment obligations.

Changes in interest rates may adversely affect the market value of some of the Company’s investments.

Debt instruments may be repaid by issuers at short notice: as a result it may be difficult for the Company to reinvest capital at an attractive price or at all, which may affect it adversely.

A variety of factors, such as market conditions, liquidity concerns or Company performance may lead to a reduction in trading volume or shares trading at a discount to their net asset value. Shareholders may also be unable to realise their investment at quoted prices or at all. Please note this is not an exhaustive list, please refer to the risk section in the Prospectus for further details.

We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

The views expressed in this document should not be taken as a recommendation, advice or forecast.

This financial promotion is issued by M&G Alternatives Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations. The registered office and principal place of business of the Company is Beaufort House, 51 New North Road, Exeter EX4 4EP. The Company was incorporated with the name M&G Credit Income Investment Trust plc in England and Wales on 17 July 2018 with registered number 11469317.

The views expressed here should not be taken as a recommendation, advice or forecast.

The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested. 

Related insights