Strategy 3. Floating-rate Notes
Floating-rate notes are short-term bonds whose rates are tied to a benchmark, usually the London interbank offered rate (aka Libor), which is a benchmark rate that some of the world’s leading banks charge each other for short-term loans.
Difference Between a Floating-rate Note and a Bond
A typical bond has a fixed interest rate throughout its life, while the rate on a floater fund is pegged to a predetermined spread to Libor and usually is adjusted every 30, 60, or 90 days. If you expect the Fed to raise short-term interest rates, then Floaters are a good investment vehicle because the higher Fed-funds rate rises will push short term benchmark rates such as the Libor's yields higher; as the holder of floaters, you will benefit accordingly.
Here is a list of Best Bank Loan portfolio recommended by the U.S. News & World Report.
Floaters are typically backed by below-investment grade loans, therefore floating-rate funds tends to be a lot riskier than Treasury notes. As a result, you should view them as an alternative to junk-bond funds.
In our next blog post, we will discuss REITs.