Floating rate bonds and inflation: what pays off?


Floating rate bonds are intended to be veil right now.

So why are they shipwreck?

Last week we lamented why most bond funds are down this year. The uncontrollable long rate is to blame.

Ten-year treasury bills started the year with a yield of 1.5%. Now they are paying 2.4%, or 60% more in a quarter!

No one wants the 1.5% vintage when they can “step up” to 2.4%. Thus, the old 1.5% bonds, while paying their coupons, lose value.

The same goes for funds that own treasury bills. the iShares 20+ Year Treasury Bond ETF (TLT), one of the most popular bond tickers on the planet, is down 10% year-to-date. That’s not exactly what retirees are looking for.

Enter the floats. They have variable coupons – interest payments – which are calculated quarterly or even monthly. Their rates start with a benchmark rate, such as the federal funds rate, and add a set payout percentage to it. When the reference rate increases, the coupon payment also increases.

the iShares Floating Rate Bond ETF (FLOT) is the ETF enthusiasts alternative to TLT. FLOT buys floating rate corporate bonds.

These bonds aren’t as bulletproof as Treasuries, but they’re close, because FLOT only buys investment-grade paper.

FLOW is do better than TLT. Unfortunately, FLOT shifts the money stuffed under my mattress since the beginning of the year:

FLOT gives a paltry 0.6%. Deposit a million dollars in this fund and we reap only 6,000 dollars in annual income. rather miserable for a seven-digit account.

Of course, FLOT fanboys will point to a price hike. But if the price of FLOT cannot float higher under these conditions, when will be does it come together?

Floating-rate closed-end funds (CEFs) typically beat their comatose ETF counterparts. CEFs benefit from active management. When we let ETF computers do the fixed income picking, they lose to my mattress.

My “go to” variable rate CEFs are Eaton Vance Floating Rate Income Fund (EFT) and BlackRock Floating Rate Strategies (FRA). Contrarian Revenue Report subscribers and I have had affairs with each during a previous rate hike period.

Yields on EFT and FRA look good today at 7% and 6.2% respectively. Both funds trade at discounts at their net asset values.

Plus, we love EFT Director Ralph Hinckley. Ralph and his predecessor, Scott Page, have done well in rising rate environments because their loans, on average, reset every 45 days. EFT doesn’t get stuck when rates rise – Ralph and Scott usually turn to higher yielding investments.

Time to reconnect with the floating rate bond boys?

I to wish income investing was as simple as that. The problem is, EFT and FRA don’t float either. EFT is down 11% year-to-date, while FRA is down 2%. Investors who buy these funds for inflation insurance have been disappointed.

We love Ralph, but higher rates are coming to him too fast and furiously today. He can’t move fast enough.

To paraphrase Western philosopher Peter “Maverick” Mitchell, we feel the need for speed (Superior gun, 1986). We Cash Flow Investors Want More Than Inflation Assurance promised by floating rate bonds.

Yes, we also want a price increase.

Inflation-protected payments? No, pour us something stronger. We want inflation-friendly dividends.

Brett Owens is Chief Investment Strategist for Opposite perspectives. For more income ideas, get your free copy of his latest special report: Your early retirement portfolio: huge dividends, every month, forever.

Disclosure: none


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