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How the Bond Markets React It sort of takes the fun out of receiving news when the news is highly predictable. As welcome as the quarter point increase in the fed funds rate offered by the Federal Open Market Committee, few took it as the wake-up call it was meant to be. But that is understandable.
The gradual increase in floating rate debt issuances does, however, reflect that change. Floating rate debt, often done as a swap from fixed is designed to balance the need for cash with the cost of getting it. This equilibrium that companies seeks occur during periods of steeper yield curve. According to the Bank of Montreal, just that atmosphere is causing the notable increase in these types of securities.
Remember though that these are high yield offerings and do carry an increased amount of risk. Interest rate risks effect credit quality and the measured pace of rate increases have allowed this type of bond to command a much larger portion of offerings than previous rate hike cycles. As long as the F.O.M.C. moves with predictability, these floating rate issues will gain acceptance as the last best place to garner the returns without holding bonds for the long term.
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