With the Federal Reserve on course to raise interest rates several more times this year, fixed income investors may want to consider other corners of the bond market, including floating rates.
Exchange traded funds, including the WisdomTree Bloomberg Floating Rate Treasury Fund (NYSEArca: USFR), have increased the accessibility of floating rate notes.
Floating rate notes, like the name suggests, have a floating interest rate. Specifically, the notes’ have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.
As a result of the safe and conservative nature of floating rate bonds, investors should not expect high yields. Nevertheless, Treasury money market funds are so starved for yield that anything with an extra basis point or two and the quality and liquidity of a Treasury security will provide an attractive alternative.
“The interest rate for an FRN ‘floats’ or gets reset at the weekly 13-week t-bill auction. As the Fed raises rates, the rate hike is reflected in this t-bill auction, not only offering investors a rate hedge for their portfolios, but also providing the opportunity for higher yield enhancement,” according to WisdomTree.
USFR, which debuted in February 2014, follows the Bloomberg U.S. Treasury Floating Rate Bond Index. The fund’s holdings are priced at a spread over 3-month Treasury bills. Floating rate notes featured in USFR mature in 2019 and 2020.