The Wall Street Journal's Jason Zweig asks in his "Intelligence Investor" column this weekend, "How Much Will 'Floating Rate' Funds Really Float?" He writes, "Investors who have been loading up on "floating rate" mutual funds this year to capitalize on rising interest rates might be in for a surprise—even if rates rise. Floating-rate funds are unique among fixed-income vehicles, giving investors the potential to benefit from -- rather than be hurt by -- rising interest rates. They hold lower-quality corporate loans whose interest payments can reset every three months or so, enabling the funds' yields to ratchet up if short-term interest rates rise -- unlike conventional bonds, which go down in value when rates go up. With nearly everyone sensing that rates are bound to go up sooner or later, it isn't surprising that investors have become infatuated with floating-rate funds.... Their assets have grown by 50% in just five months and have more than doubled over the past year to some $70 billion. So what is the problem? Floating-rate funds might not be quite as buoyant as investors expect. The income generated by bank loans has long been based on Libor, or the London Interbank Offered Rate, a standard measure of what banks charge one another to borrow. This week, the three-month Libor rate was below 0.25%, near all-time lows. But about two years ago, bank loans began to include "Libor floors," or minimum levels at which their income payments begin ratcheting upward if interest rates rise."
