A guide to high yield floating rate notes – seeking protection against rising interest rates and inflation

4 min read 7 Mar 22

  • High yield floating rate notes (HY FRNs), also known as floating rate bonds, are a growing subset of the global high yield (HY) bond universe. Their main potential advantage over traditional HY bonds is their floating rate cash payments (coupons), which generate income that moves in line with interest rates and potentially reduces the risk of capital loss in rising rate environments due to their minimal interest rate sensitivity.
  • HY FRNs could also offer more defensive characteristics than traditional HY bonds, in our view, with lower market volatility and a higher proportion of bonds ranked higher in the capital structure. In managing our HY FRN strategy, we seek to further reduce potential risks and increase diversification relative to the benchmark index.
  • As with regular HY bonds, HY FRNs also generate higher potential income than their investment grade counterparts, which can help to protect against inflation eroding the value of future cashflows. However, as high yield debt is riskier than debt with better creditworthiness, a selective investment approach is required to mitigate the additional risks.
  • Despite being smaller than the global HY bond market, HY FRNs are liquid securities and daily dealing can be maintained, even in stressed market conditions.

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