Insights

Today’s Case for Floating Rate Notes

When thinking about the exposure to duration and credit in your client’s portfolios, there are a number of factors to consider aside from valuation. In this piece we explore how Floating Rate Notes can complement duration within a portfolio.

16 March 2023 8 min read

The current environment is a challenging one for Asset Allocators. Whilst inflation numbers have peaked in the US, other parts of the globe are still experiencing inflation levels that haven’t been seen in decades.

Central banks remain hawkish and the risk of policy misstep is increasing. This begs the question – is now the right time to increase duration given that the risks of a recession are increasing? And how should we think about duration given that stocks and bonds have moved with positive correlation over the last year? Will this continue through 2023?

Whilst most would agree that the relative attractiveness of duration has improved, the return journey for bond investors is unlikely to be a smooth one for the simple fact that a 30 year bond bull market cannot be unwound over a 12 month period.

We’ve also seen more noise and uncertainty in markets driven by a shift from central bank monetary policy synchronization, to more divergent policy settings to manage local inflation conditions.

When thinking about the exposure to duration and credit in your client’s portfolios, there are a number of factors to consider aside from valuation. In this piece we explore this further but remain strong advocates of Bank issued Floating Rate Notes.

Disclosure

Issued by State Street Global Advisors, Australia, Limited (AFSL Number 238276, ABN 42 003 914 225) (“SSGA Australia”). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: +612 9240-7600 · Web: ssga.com.

The views expressed in this material are the views of the Fixed Income Strategy Team through the period ended 28 February 2023 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. There is no representation or warranty as to the current accuracy of this material, and SSGA Australia shall have no liability for decisions based on such information.
Investing involves risk including the risk of loss of principal.

Floating rate securities are often lower-quality debt securities and may involve greater risk of price changes and greater risk of default on interest and principal payments. The market for floating rate securities is largely unregulated and these assets usually do not trade on an organized exchange. As a result, floating rate bank loans can be relatively illiquid and hard to value. Diversification does not ensure a profit or guarantee against loss.

The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially slower than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.
Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates rise bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks but provide lower potential long-term returns.
All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

BLOOMBERG and BLOOMBERG INDEXES are trademarks or service marks of Bloomberg Finance L.P. Bloomberg Finance L.P. and its affiliates (“collectively, “Bloomberg”) or Bloomberg’s licensors own all proprietary right in the BLOOMBERG INDEXES. Bloomberg does not approve or endorse this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any part of this material.
Past performance is not a reliable indicator of future performance.

The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA Australia’s express written consent.

Tracking: 5503019.1.1.ANZ.RTL
Exp. Date: 31/03/2024