Why Are Floating-Rate Bonds Sinking As Rates Rise?
2022.04.06 16:40
Floating-rate bonds are supposed to be right now. So why are they ?
Last week we lamented the reason most bond funds are down this year. The runaway long rate is to blame.
Ten-year Treasury bonds began the year yielding 1.5%. Now, they pay 2.4%, a whopping 60% more in a quarter!
Nobody wants the 1.5% vintage when they can “level up” to 2.4%. So the old 1.5% bonds, while still paying their coupons, lose value.
So do funds that own Treasuries. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), one of the most popular bond tickers on the planet, is down 10% year-to-date. Not exactly what retirees are looking for.
Enter floaters. They have variable coupons—interest payments—that are calculated quarterly, or even monthly. Their rates start with a reference rate, such as the federal funds rate and add a defined payout percentage to it. When the reference rate ticks higher, so does the coupon’s payout.
The iShares Floating Rate Bond ETF (NYSE:FLOT) is the ETF lovers’ alternative to TLT. FLOT buys corporate bonds with floating-rate features. These bonds aren’t as bulletproof as Treasuries, but they are close, because FLOT only buys investment-grade paper.
FLOT doing better than TLT. Unfortunately, FLOT the cash stuffed under my mattress year-to-date:
Fixed Rate Bond Funds
FLOT yields a puny 0.6%. Drop a million dollars into this fund, and we reap just $6,000 in yearly income. for a seven-figure account.
Sure, the FLOT fanboys will point to price upside. But if FLOT’s price can’t float higher under conditions, when it rally?
If Not Now, When?
FLOT-Disappoints
Floating-rate closed-end funds (CEFs) usually beat their comatose ETF counterparts. CEFs benefit from active management. When we let the ETF computers do the fixed-income picking, they lose to my mattress.
My “go to” floating-rate CEFs are Eaton Vance Floating Rate Income Closed Fund (NYSE:EFT) and BlackRock Floating Rate Income Strategies Closed Fund (NYSE:FRA). The yields on EFT and FRA look good today, at 7% and 6.2%, respectively. Both funds trade at to their net asset values.
Plus, we like the EFTs’ manager, Scott Page. Scott has done well in rising rate environments because his loans, on average, reset every 45 days. EFT isn’t stranded when rates rise—Scott usually cycles into higher-paying investments.
Time to reconnect with Scott?
I income investing were that easy. Problem is, EFT (Scott’s raft) and FRA . EFT is down 11% year-to-date, while FRA has shed 2%. Investors who buy these funds for inflation insurance have been disappointed.
Floating Rate Funds
Disclosure:
