Investors flood into floating rate corporate debt in bet on recovery

Tim Wallace
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FLOATING rate bond issuance has jumped sharply in the last eight months, Fitch Ratings said yesterday, as the market starts to recover from the aftermath of the financial crisis.

Investors are increasingly expecting interest rates to rise and so do not want to be locked into fixed rate instruments, the ratings agency believes.

Interest rates have been at rock bottom since the financial crisis struck five years ago, but the emergence of uncertainty over rates shows growth – and so higher rates – appears to be making a return.

The proportion of corporate bonds with floating rates jumped to 15 per cent in 2013 so far, up from between six and nine per cent over the last five years.

“As the interest rate cycle turns, following years of historically low rates, duration risk is an increasing concern for investors,” Fitch said.

“This is fuelling demand for floating-rate notes among vanilla-debt investors who are unable to hedge their interest-rate exposure through the swap market.”

The agency expects the level of floating rate issuance to increase further as it remains below the 24 per cent average in the boom years from 2004 to 2007.