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Investors Flock to Floating Rate ETFs on Interest Rate Concerns


The first new floating rate U.S. Treasury security in 16 years met heavy demand ahead of debt ceiling talks and Fed tightening for the year. Bond investors have been shifting over to floating rate exchange traded funds over the past year and may soon gain exposure to floating-rate public obligations of the U.S. Treasury as well.

The Treasury sold $15 billion floating rate notes and brought in $85 billion in orders, a bid-to-cover of 5.67 times, reports Michael Mackenzie for Financial Times.

Demand will likely pick up in money market funds as they boost yields and avoid potential volatility from fights over the next debt ceiling deadline in March.

“Treasury money market funds are so starved for yield that anything giving them an extra basis point or two, and with the same quality and liquidity features of a Treasury security, means it’s a no brainer for them to own,” Peter Crane, president of Crane Data, said in the article.

The floating rate notes will generate more interest if Treasury prices fall and yields continue to rise, which should play out if the Fed continues to taper its accommodative measures.

Floating rate ETFs have been popularly received over the past year as their low reset period helps diminish risk to rising interest rates.

For instance, the PowerShares Senior Loan Portfolio (BKLN) , a floating-rate, high-yield, senior loan ETF, was one of the most popular ETFs of 2013.

Other floating rate bond ETFs include the iShares Floating Rate Bond ETF (FLOT) , SPDR Barclays Investment Grade Floating Rate (FLRN) and Market Vectors Investment Grade Floating Rate (FLTR). All of these ETFs, though, track corporate sectors, mainly financials and industrials.

However, ETF providers are working on floating rate Treasury note ETFs. SSgA filed with the SEC to launch the SPDR Floating Rate Treasury ETF (FLTY) and WisdomTree filed to launch the WisdomTree Floating Rate Treasury Fund – WisdomTree did not provide a ticker symbol. Additionally, BlackRock’s iShares recently filed to launch the iShares Treasury Floating Rate Bond ETF (TFLO) . [ETF Sponsors Engineer Floating-Rate Treasury Offerings]

For more information on the bond market, visit our bond ETFs category.