Barron's Says Beware Floating Rates
The latest Barron's features the article, "Beware the Risks of Floating-Rate Funds." Subtitled, "High yields can blind income seekers to the dangers of these below-investment-grade investments," it says, "Words are powerful, and for investors seeking income, the words "floating rate" are particularly alluring these days. The Federal Reserve is likely to raise interest rates again in December, and rates globally have risen sharply in just the past week. When rates rise, bond prices fall. But the coupons of floating-rate securities adjust higher, so they pay more and their prices are stable. If only it were that simple. A wide array of floating-rate securities trade today, and the holdings of mutual funds with "floating rate" in their name vary widely. Such funds, which offer investors high yields -- now close to 4% -- often hold what are known as bank loans, leveraged loans, or senior loans. Regardless of what they're called, these loans are made to below-investment-grade companies—and thus are packed with credit risk." The piece quotes Brian Rehling from Wells Fargo Investment Management, "Most of the funds that are floating-rate tend to be bank-loan funds, whether they say it or not.... They have higher yields, and with funds, yield sells."
