How to Invest in Floating Rate Notes
Floating rate notes, called floaters, are debt instruments with variable interest rates. The rate adjustments typically occur at six-month intervals, though some floating rate notes reset monthly or quarterly. Floating rate notes are often used when market participants expect short-term interest rates to increase. Investors can access floating rate notes in several ways.
Corporate bonds are one way for investors to get involved with floating rate notes. Yields on corporate floaters from highly rated issuers usually aren't generous, but in most cases they beat the yields on money markets or certificates of deposit. Corporate floaters can be purchased through bond dealers or traditional brokerages. Unlike bank instruments, these floaters aren't insured by the Federal Deposit Insurance Corp.
The U.S. Treasury also offers floating rate notes, but its issuance of floaters has paled in comparison with its issuance of other bonds. Because of increased investor demand and new governmental funding needs, the U.S. Treasury has signaled that it will increase issuance of floating rates. In some cases, floating Treasurys can be bought directly from the department during an auction. Investors also can purchase these notes from traditional brokers.
U.S. issuers do not have the market cornered on floating rate notes, so investors looking for global floaters have some options. Most of the international floaters that U.S. investors can get their hands are highly rated corporates that, like their U.S. counterparts, offer yields that are better than cash instruments. The market for government-issued international floaters is somewhat limited, so investors will probably find many more corporate international issues.
Floating rate notes can also be accessed through vehicles such as mutual funds and exchange traded funds, or ETFs. Although floating rate ETFs are not as old as their mutual fund counterparts, these products have become popular, and they usually charge expense ratios that are lower than the ratios on floater mutual funds.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.