Investors Still Better Off in Short-Term, Fixed-Rate Securities
A new report released today by the PSS Center for Financial Research, a division of PSS & Co., Inc., cautions investors about the risks of investing in floating-rate bonds too early, noting that short-term, fixed-rate securities may still be the better choice in the current environment. PSS’s fixed income experts say that by prematurely anticipating a rise in short-term interest rates, investors in floating-rate bonds may inadvertently be giving up current income in exchange for the potential for higher coupon payments down the road.
Floating-rate bonds, also referred to as “floaters,” track changes in interest rates and adjust their coupons accordingly. They tend to perform well when short-term rates rise, but what many retail investors don’t realize is that income from floaters only rises when short-term interest rates increase – not when long-term rates go up alone.
The Case for Fixed-Rates Now
The impact of rising interest rates on an investor’s bond portfolio is important, and the authors agree that bond yields will likely continue to rise going forward. But PSS’s experts believe the pace will be slower than many are predicting, and the magnitude of the rise may be lower than many anticipate.
The white paper explains that floating-rate bonds, which come with their own set of risks, can make sense for a fixed income portfolio when a rise in short-term interest rates is expected in reasonably short order. The authors point out that most fixed-rate bonds currently offer higher yields than comparable floaters, however – so opting for floating-rate securities may now mean that investors are giving up too much current income.
More information is available at www.pssinvest.com. Follow us on Twitter, Facebook, YouTube, and our Instagram.