WisdomTree and State Street Global Advisors are both working floating-rate Treasury exchange traded funds as an alternative for bond investors to shield against the negative effects of rising interest rates.
Both funds will track floating rate public obligations of U.S. Treasuries, or “FRNs,” with coupon rates expected to reset weekly according to the result of the most recent 13-week T-bill auction, plus a spread, subject to a minimum net yield of zero percent.
Fixed-rate bond prices have declined as rates increased. The yield on benchmark 10-year Treasuries have increased over 100 basis points from the 1.6% low in May. Meanwhile, the Barclays U.S. Aggregate Bond Index has declined 3.5%.
While the floating rate component helps protect against rate risk, floating rate Treasuries currently have low yields. For instance, the fixed-rate two-year Treasury yields around 0.3%, and a floating rate version could offer even less, reports Jason Kephart for InvestmentNews.
“You need a base T-bill rate that’s somewhere north of zero to make it very attractive for a fund that’s also charging for their management,” Melissa Joy, director of investments at the Center for Financial Planning Inc., said in the article.