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?

economicz

It makes sense as an inflation hedge in a buy-and-hold strategy. Prices should be stable, but there might be deviations from their fair value, which offers trading opportunities.

kkn006

cityboy Wrote:
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> It makes sense as an inflation hedge in a
> buy-and-hold strategy. Prices should be stable,
> but there might be deviations from their fair
> value, which offers trading opportunities.


Are you suggesting arbitrage trading only?

Dapper425

Well, you still earn interest on the bonds.

liquidity

ohai Wrote:
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> Well, you still earn interest on the bonds.


Yes of course, but with a fixed coupon, you can also have capital gain/loss, which doesn't seem possible with a floating-rate bond.

Unforseen

Dreary Wrote:

> Are you suggesting arbitrage trading only?

Yes, I think arbitrage trading makes most sense to me. Don't really know much about this market though.

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.

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

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.

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.