Summary: As depicted by the below graph, floaters are typically attractive in a rising-interest-rate environment because their prices are not very sensitive to changing interest rates. Their coupon rate adjusts to shifts in short-term interest rates, so their prices are not as susceptible to pricing fluctuations. This tends to result in more stable prices regardless of what Treasury yields are doing. Because of the type of floaters financial institutions purchase, credit quality is usually of lesser concern, allowing for a stable pricing structure you may wish to consider if you are not already doing so.
Investment-grade floating-rate notes, commonly referred to as "floaters," are a type of investment whose coupon rates are tied to a short-term benchmark rate, LIBOR or SOFR. A measure of additional yield is usually added to the reference rate to compensate investors for the risks of the underlying issuer, for quality issuers, usually 15 to 50 bps.
The underlying reference rates for floaters can vary these days. Historically, floaters were referenced to the three-month London Inter-bank Offered Rate (LIBOR) but as you likely know, that rate is in the process of being retired. Many recent floater issues use the Secured Overnight Financing Rate (SOFR) as the reference rate.
The Basics of Floaters over time (see graph below)
In addition, if you are looking to decrease your portfolios duration, floaters may be an additional good tool to accomplish this as they are typically associated with the "less than 3 month" bucket in call reports regardless of maturity.
If you would like a second opinion as to how floaters might help to achieve your goals, or would like to see how Top-20% performing community financial institutions are using floaters to achieve superior performance in a rising rate environment, give us a call. We would be happy to show you.
We offer Community Financial Institutions complementary Transparency Analysis. Now is a great time to take advantage of it. Please get with your Financial Advisor at SB Value to guide you through these turbulent times of balance sheet change. We look forward to it.
As always, consider a first or second opinion from SB Value Partners by eMailing us back today.
Let SB Value help you examine all these, and other methodologies, to build out your future pathways to optimizing your success.
Questions? ASK US HOW to start a complementary analysis now. It’s a great time to get some additional clarity. Learn some additional truths on the front end. It may position your bank for added improvements in 2022 and into a better positioning for 2023. Listen to what a few thought leaders have to say who have written white papers on the topic at hand. Take a read through a few Fact Sheets on the subject that we would be happy to provide.
As fiduciaries we see quite a lot – in fact we have recently reviewed just under 14,000 data points from Community Financial Institutions – likely just like yours. We look forward to sharing with you some of what we have learned. In the meantime, we thought we would help with some general information that you and your team can consider right away to round out what you are already doing. There is a lot that’s beneficial, starting with cost savings, yield improvements, and likely better balance – even protection. To find out more please click here on our website.