From: Todd Shriber
When rates are on the rise, consider floating rate notes.
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Floating rate notes, called floats, are debt securities with variable interest rates. Rate adjustments generally occur every six months, although some floating rate notes reset monthly or quarterly. Floating rate notes are often used when market participants expect interest rates to rise in the short term. Investors can access floating rate notes in several ways.
Corporate bonds
Corporate bonds are a way for investors to get involved in floating rate notes. Float company returns from highly rated issuers are generally not generous, but in most cases they beat money market or certificate of deposit returns. Corporate floats can be purchased through bond brokers or traditional brokerage houses. Unlike banking instruments, these floats are not insured by the Federal Deposit Insurance Corp.
treasures
The US Treasury also offers floating rate notes, but its floating rate issuance has paled in comparison to its issuance of other bonds. Due to increased investor demand and new government funding needs, the US Treasury has signaled that it will increase the issuance of floating rates. In some cases, floating treasury bills can be purchased directly from the department at an auction. Investors can also purchase these Notes from traditional brokers.
International floats
US issuers don’t have the market cornered by floating rate notes, so investors looking for global floats have some options. Most international floats that U.S. investors can get their hands on are highly rated companies that, like their U.S. counterparts, offer higher yields than cash. The market for government-issued international floats is somewhat limited, so investors are likely to find many more international corporate issues.
Funds
Floating rate notes are also accessible through vehicles such as mutual funds and exchange-traded funds, or ETFs. Although floating rate ETFs are not as old as their mutual fund counterparts, these products have become popular and they generally charge lower expense ratios than floating rate mutual funds.
The references
Biography of the writer
Todd Shriber is a financial writer who began covering the financial markets in 2000. He worked for Bloomberg News for three years and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber holds a Bachelor of Science in Broadcast Journalism from Texas Christian University.
