The market for longer-dated floaters has opened up in recent weeks, in a trend market watchers say is being fueled by demand from non-traditional sources, including hedge funds.
A slew of recent 10-year floating-rate deals from issuers including Goldman Sachs, General Electric and Bank of America has fixed-income professionals intrigued by the increased demand for longer floaters. "Floaters are traditionally within the three-year portion of the curve," said one high-grade credit strategist. "It's not only the traditional front-end accounts buying floaters, but hedge funds are buying them now, too," he added.
Hedge funds can invest farther out on the curve than traditional floating-rate buyers with short-term liabilities to match. Market participants anticipate floating-rate issuance will continue, as investor demand shows no sign of slowing and hedge funds become a more significant component of the buy-side.
One portfolio manager, who does not make interest-rate bets and therefore does not buy floaters, noted they are not part of traditional fixed-income indices and so by purchasing floaters, managers are increasing their tracking risk. High-grade floating-rate issuance has surpassed fixed-rate issuance this year, at $253 billion and $240 billion, respectively, he said.
