Institutional investors' appetite for floating-rate securities is growing, and they are eagerly anticipating the U.S. Treasury Department's January auction of floating-rate notes.
This is the first new product the department has brought to market in 17 years, since introducing Treasury inflation-protected securities in 1997.
The Treasury Department's move to sell floating-rate notes, contemplated for some time, demonstrates the U.S. government's interest in expanding the potential buyer base for its debt. The FRNs enable Treasury to sell to buyers seeking protection from the anticipated rising interest rate environment.
“Several years ago (floating-rate securities) may have been more of a niche asset class. Now it's seen as more of a strategic allocation,” Stephen Hillebrecht, fixed-income product strategist at Lord, Abbett & Co. LLC, Jersey City, N.J., said in a telephone interview. “It will diversity your overall portfolio.” Lord Abbett currently manages $8.8 billion in bank loans, all floating-rate securities.
The Treasury's first floating-rate note auction — of probably between $10 billion and $15 billion —is set for Jan. 29.
More institutional investors are turning to floating-rate securities — which include bank loans and collateralized loan obligations — as a way to earn yield and protect their fixed-income portfolios from rising interest rates. Investors look to floating-rate strategies as a means to get attractive income with low or no duration. The total size of the institutional bank loan market, using the Credit Suisse Institutional Leveraged Loan index, was approximately $733 billion, as of Oct. 31.
In late October, the $41 billion Teachers Retirement System of the State of Illinois, Springfield, made its second floating-rate investment, part of a revamp of its fixed-income portfolio. Trustees approved a $34 million floating-rate fixed-income allocation to Houston-based manager Garcia Hamilton & Associates LP.
Earlier last month, the Oklahoma State Regents for Higher Education, Oklahoma City, approved a $13 million investment in Oaktree Capital Management's U.S. senior loan fund as part of the $645.3 million endowment's decision to shift to floating-rate debt and equities from bonds.