In its June meeting, the Federal Reserve increased interest rates by 0.25%, which was widely expected. It also hinted that there might be two more rate hikes in 2018, for a total of four hikes in the year. Earlier, three rate hikes were expected in 2018. Other big news was the imposition of tariffs by the Trump administration on Chinese imports.
There is a possibility that trade wars between China and the United States could lead to fewer rate hikes in 2018. Every rate hike impacts Prospect Capital (PSEC), so fewer rate hikes might help it earn more interest income since the demand for loans could increase.
How could slower hikes benefit Prospect Capital?
In the fiscal third quarter of 2018, Prospect Capital saw total originations of $429.9 million, which reflects a substantial decline sequentially. The company is completely focused on capital protection as well as risk reduction. Interest rates play a vital role in its originations. An increase in interest rates restricts its origination capabilities. In its fiscal third quarter, it had total repayments of $118 million.
So if the trade wars between China and the United States result in fewer rate hikes in 2018, Prospect Capital’s originations could have a positive impact.
On June 26, Prospect Capital’s dividend yield was 10.6%. Its peers (XLF) had the following dividend yields: