A guide to high yield floating rate notes – seeking protection against rising interest rates and inflation
4 min read7 Mar 22
By M&G Investments
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.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
Viewing this website in Switzerland is not permissible with the exception of the distribution to qualified investors according to the Swiss Collective Investment Schemes Act with the status of 01.07.2016, the Swiss Collective Investment Schemes Ordinance with the status of 1 January 2015 and the respective Circular 2013/9 issued by the Swiss Financial Market Supervisory Authority ("Qualified Investors"). Supplied for the use by the initial recipient (provided it is a Qualified Investor) only, not for onward distribution to any other person or entity.
The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
This financial promotion is issued by M&G Luxembourg S.A.