Investment-grade floating rate notes are in high demand as fixed income traders try to get ahead of the Federal Reserve’s interest rate hikes. Investors can also diversify their bond portfolios with exchange traded funds that specifically focus on this market segment.
In response to the surge in demand, large banks like JPMorgan Chase & Co., Morgan Stanley, Citigroup Inc., and Mizuho Financial Group Inc. have jumped on to the investment-grade bond market, Bloomberg reports.
The sales come as rising yields on Treasuries have contributed to steep losses on longer-duration bonds that are more sensitive to falling rates.
“We’re seeing a lot of retail interest in investment-grade floating-rate debt,” Matt Brill, head of U.S. investment-grade at Invesco Ltd., told Bloomberg Television. “We keep begging the banks for more IG floaters because that’s the place to be for now.”
Floating-rate supply only trickled during most of the COVID-19 pandemic as borrowers tried to capitalize on the near-zero rates. However, sales of the debt have since surged to start 2022 in response to the Fed’s changing monetary policy outlook. Investors view the floating rate securities as a way to generate yields without taking on duration risk with rising rates ahead.
“Investors remain thoughtful about risk, and given the pending lift-off by the Fed, the attractiveness of the front-end of the yield curve remains limited,” Tom Farina, co-head of credit at DWS North America, told Bloomberg. “Floating-rate debt is a way to take credit risk while limiting duration risk.”
ETF investors can also diversify their bond portfolios with an investment-grade floating rate component through ETF strategies like the iShares Floating Rate Bond ETF (FLOT), the SPDR Blmbg Barclays Investment Grade Floating Rate ETF (NYSEArca: FLRN), the VanEck Vectors Investment Grade Floating Rate ETF (FLTR), and the Invesco Variable Rate Investment Grade Portfolio (NASDAQ: VRIG).
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