The Case for Investment Grade Corporate Floating Rate Notes (FRNs)

Expectations for further U.S. rate hikes in 2019 have crumbled recently. However, we believe there are still reasons to consider investment grade corporate floating rate notes (FRNs) in a portfolio.

First, a pause in rate hikes, along with economic growth and low inflation, is generally positive for credit. FRNs of corporate issuers may outperform those issued by sovereigns or agencies in this environment.

Second, although further hikes are not currently expected, some investors may want to hedge against an upside surprise. FRNs can help lower duration without giving up yield.

Lastly, FRNs may diversify a bond portfolio, as illustrated by low or negative correlation to most fixed income sectors.