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When interest rates are threatening to rise, many income investors hesitate to lock in fixed rate coupons. The use of Fixed to Floating or Floating-Rate securities in an income generating strategy could be a solution for obtaining higher yields with investment grade securities as rates rise.
A floating rate structured security has a variable interest rate which is tied to a reference rate. Common reference rates include the 3-month LIBOR (London Interbank Offer Rate) and the Consumer Price Index (CPI).
Once the reference rate has been established, the issuer will determine the spread it is willing to pay above the reference rate, let’s say 200 bps. And finally, the issuer will determine a reset period which designates how often the interest rate is adjusted, which could be daily, monthly, quarterly, or annually. The coupon for this security would then read something like “Quarterly Reset, 3-month LIBOR + 200bps”.
Fixed to Floating Rate preferred securities offer a fixed coupon until a certain date, when they become floaters.
What are we thinking?
Compared to traditional fixed rate securities, floating rate securities offer some interest rate risk protection, pay higher yields as rates rise, are less rate sensitive than Treasury yields, and are not as price sensitive since coupons change when the market rate changes.
By incorporating Fixed to Floating rate preferred securities into CIP’s preferred allocation, we believe we are offering an attractive solution for income investors who are looking for conservative allocations and additional yield. And as active managers, we monitor the reference rates, credit, and call risks.
Source: Raymond James
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.