Trading floating-rate bonds, is it any good? interest, direction, understand

JGovender

This is a basic question. I'm not sure I understand if it makes any sense to trade floating rate bonds. I know with fixed coupon, you can bet on interest rate direction and gain as the price moves up or down, but with a stable price on floating-rate bonds, it just doesn't make sense to do so. Comments?

LPoulin133

Dreary Wrote:
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> Conclusion: don't trade these kinds of bonds for
> capital gains. Do so only for income and only if
> you expect rates to rise.


False. When credit spreads blow out and there are liquidity driven dislocations, the floating rate asset class can be very attractive from a capital gain perspective.

Zestt

Yes you're right, there would be... taken to the extreme, if the spread was 1000 bps over LIBOR, you would have an almost fixed coupon. In this case, would the price be stable? Probably not.

cfalevel2011

Hmm. I guess a lot of floating rate bonds pay a reference rate plus some spread, like libor + 20 bp. So, there would be some non-negligible duration from the spread part.

cv4cfa

Paraguay Wrote:
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> There are lots of credit upside trades to be done
> in the floating rate sector.

Care to elaborate?

redskins44

There are lots of credit upside trades to be done in the floating rate sector. There are a few active strategies.

Muddahudda

Conclusion: don't trade these kinds of bonds for capital gains. Do so only for income and only if you expect rates to rise.

SpyAli

Look at the prices of those bonds in 2008. Since they are usually junk issuers, credit spreads can and will have bonds trading significantly away from par.

ohai

rates rising is implicit in the price of the floating rate bonds. you need rates to go up faster/farther than expectations. this assumes youre not looking at the credit spread implications

giants2010

If you expect interest rates to go down, you had better sell your floating rate bonds fast. Very fast.

If rates go down, you want to increase the duration of your portfolio and floating rate bonds usually have short durations. When rates go down, the interest income will reduce while the price of the bond will remain stable since it will adjust to par value as long as there is no cap or floor on the coupon.

Compare with fixed rate bonds. When interest rates drop, the interest income remain fixed while the price rises. This will improve the total return compared with a floating rate bond.