Boring FRNs? Now they're for rock stars only
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Boring FRNs? Now they're for rock stars only

Cheering crowd at a concert

If rate cuts are further delayed, the red hot streak of floating rate note issuance will continue

Floating rate notes have traditionally been confined to the boring part of the bond markets. They are mostly short-dated, defensive products that tend to provide a hedge from rates fluctuations and are often bought by regulated investors for specific purposes.

Up to the two year point of the maturity curve, these buyers have mostly been money market funds — another supposedly unexciting part of the financial markets.

FRN issuers rarely win accolades for what are viewed as easy to execute transactions.

But this year, the floater has elevated both investors and bank issuers — the main suppliers of the product in euros — to rockstar status. And with rate cut expectations fading, the buying and issuing of FRNs this year, is no longer dull.

Three-month Euribor, which FRNs tends to track, has fluctuated by around 15bp over the past six months. Two year swap rates have veered by almost 100bp.

Not only have FRN investors have enjoyed better rate stability, they have also pocketed almost 100bp higher returns than fixed rate buyers who have taken equal credit risk at the same maturities.

Issuers have also gained cost-effective funding, enjoying a funding arbitrage in euros that saved them 10bp-15bp in recent weeks compared to fixed rate deals.

The arb is even greater at the three year part of the curve, where Intesa Sanpaolo this week sold the longest FRN out of Italy since 2018 — a €1bn deal. Solid demand allowed the Italian lender to price 5bp inside fair value.

This market still has legs too. In 2023 there were €36bn of euro FRNs from financial and corporate issuers in public and club deals, as well as private placements, according to one bank’s estimate.

Year-to-date in 2024, with volumes now close to €30bn, there is still space for more. With interest rates likely to be higher for longer — as the latest US inflation numbers suggest — this rock star trade is set for an encore.

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