Those spy balloons aren’t the only floating objects worth watching right now — floating rate treasurys in an ETF like the WisdomTree Floating Rate Treasury Fund (UFSR) should be on the shortlists of yield-hungry investors, too. Yields are plentiful for those who know where to look right now, and with the prospect of inflation numbers coming in a little hot for January, the flexibility of a floating rate ETF like USFR may merit attention from market watchers.
Ahead of tomorrow’s Consumer Price Index data drop, short-term U.S. Treasury yields rose higher as expectations have grown that the Fed may keep rates higher for longer. That builds on last month’s strong jobs numbers, with incoming data points about core services and rent deflation also critical factors in the central bank’s calculations. The Fed’s next meeting will also be crucial, with some Fed watchers taking Fed Chair Jerome Powell’s last comments as “hammering home higher rates for longer.”
Average interest rates for Treasury Floating Rate Notes (FRNs) sat at 4.64% as of January 31st according to the U.S. Treasury, more than T-Bills or Treasury Bonds as of that date. That presents an appealing use case for a floating rate Treasurys ETF, like USFR, in the weeks and months ahead given the ETF’s investment in FRNs, with the ETF having added $1.5 billion in net inflows over the last three months.
USFR tracks the Bloomberg U.S. Treasury Floating Rate Bond Index, charging 15 basis points for its exposures to the FRN market. USFR targets FRNs that have a two-year term with an issue date on or before the last business day of each month, when the index rebalances. As the FRNs reset their coupon rate weekly, they can protect against potential rising rates, which would be a risk to watch if inflation data comes in hot.
And the data could indeed come in hot for a few reasons, from retail sales boosted temporarily by auto manufacturers selling to car rental companies to January’s record warmth possibly boosting consumer activity. For those investors looking for fixed income yields, but wary of rising rates, floating rate Treasurys in an ETF like USFR are a strong option to consider.
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