Tags: investors | interest | rates

Investors Flee Floating-Rate ETFs as Interest Rates Keep Falling

exchange traded fund newspaper headline on cash
(Zimmytws/Dreamstime)

Monday, 10 December 2018 10:30 AM

Floating rate exchange-traded funds are drowning as benchmark interest rates tumble to their lowest levels in months.

“All you have to do is look at the U.S. 10-year and that tells the whole story,” said Bloomberg Intelligence analyst Eric Balchunas. “When the rates fall they’re less in demand.”

Investors pulled close to $182 million from the $12 billion iShares Floating Rate Bond ETF, or FLOT, Thursday, the third straight day of outflows this week and a record since the fund’s 2011 inception.

Prior to this, FLOT hadn’t seen a single day of outflows since December 2017. Its price has tumbled 0.7 percent this week, the most since October 2011 to the lowest since April 2016.

Meanwhile, the $2.9 billion SPDR Blackstone/GSO Senior Loan ETF, ticker SRLN, had outflows of more than $235 million Thursday, the most ever, amid its worst weekly performance since December 2015. And investors yanked more than $134 million from the $4.5 billion SPDR Bloomberg Barclays Investment Grade Floating Rate ETF, ticker FLRN, which is on pace for its worst week since June 2013.

A rally in Treasuries on the back of expectations for slower interest rate increases pushed the 10-year yield to 2.85 percent Friday compared with 3.24 percent a month ago.

“It will be interesting to see if this changes the trajectory of the flows this year, which had been seeing everybody buying anything that floated and anything that had short duration,” Balchunas said.

Traders have become increasingly skeptical that the Fed will raise interest rates more than the three times it forecast for next year. Comments from Chairman Jerome Powell last week that interest rates may be “just below” neutral have led many to believe there could be fewer hikes on the horizon.

The floating-rate funds also have become a headache for market makers on a technical level, according to Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital. Bids are hard to come by, and it’s increasingly difficult for them to redeem the fund, he said. If a market maker can’t find a bid for a floating rate note, then it may be less willing to redeem the ETF, leaving it with all the underlying securities.

“The costs are higher to redeem, as bids are much lower for the products,” Bajaj said. “When this happens, market makers are just forced to sell on screens rather than to use the redemption mechanism to get out of the fund.”

Just 23 percent of FLOT’s 728 underlying bonds traded, on average, from Nov. 28 to Dec. 4, according to an emailed statement from BlackRock. As over-the-counter liquidity was challenged in FLOT’s underlying securities, investors were able to trade FLOT on the exchange with volumes ranging from $200 million to $400 million over the same period.

“FLOT has closed at a discount to its NAV in recent days,” BlackRock said. “However, these readings are stale, since many floating rate notes have not been active.”

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Floating rate exchange-traded funds are drowning as benchmark interest rates tumble to their lowest levels in months."All you have to do is look at the U.S. 10-year and that tells the whole story," said Bloomberg Intelligence analyst Eric Balchunas.
investors, interest, rates
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2018-30-10
Monday, 10 December 2018 10:30 AM
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