Floating Rate Issuance Back in Vogue

    New bond issuance in both the corporate and municipal market has been unusually tilted toward floating rate issues, whereby coupon payments rise or fall depending on the level of interest rates.  Typically tied to 3-month Libor, these bonds can be popular instruments for investors concerned with rising interest rates, as well as a source of cheap financing for borrowers.  Through February 25th, municipalities issued $1.9 billion in floating rate debt, an increase of 150% over the same period last year.  Corporations have also followed this script, and the US Treasury plans to issue Treasury floaters for the first time ever this year.  All of this is despite Fed Chairman Bernanke reiterating his stance for low interest rates last week on Capitol Hill.  We analyze and evaluate all floating rates deals that come to market, as certain issues can be attractive from a total return perspective.  We believe floating rate debt can be an attractive option for protecting portfolios from rising rates, but only when investors are not paying up for this protection.  At this point, many of the new issue floaters have been expensive in that they offer a low yield and total return potential to investors relative to fixed rate debt, but we’ll continue to keep our eyes out for the next opportunity.