It has been said that markets do not like surprises. The outcome of Tuesday's midterm elections did not provide many surprises when, as expected, the Democrats gained control of the House of Representatives and the Republicans maintained control of the Senate.
Bond markets reacted as expected, and with electoral politics in the rear view mirror, at least for now, fixed income market observers have concerns to focus on.
"Unlike the 2016 U.S. election, the fixed income arena was not greeted with any surprises this time around, so based upon the initial reaction, it appears as if the bond market has moved on quickly," said WisdomTree in a recent note. "The focus shifts right back to the domestic fundamental setting-namely, growth prospects, inflation expectations and any attendant monetary policy decisions from the Fed."
Floating rate notes (FRNs), accessible via the WisdomTree Bloomberg Floating Rate Treasury Fund (NYSEARCA:USFR), are an area of the bond market to consider following the mid-term elections. Floating rate notes (FRNs) and the related floating rate ETFs are receiving renewed attention this year as fixed income investors seek alternatives to traditional government bonds at a time when the Federal Reserve is increasing borrowing costs.
USFR ETF Details
USFR, which debuted in February 2014, follows the Bloomberg U.S. Treasury Floating Rate Bond Index. The fund's holdings are priced at a spread over 3-month Treasury bills. Floating rate notes featured in USFR mature in 2019 and 2020.
Floating rate notes, like the name suggests, have a floating interest rate. Specifically, the notes have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.
"We continue to advocate an approach that concentrates on a Treasury floating rate strategy," said WisdomTree. "The WisdomTree Floating Rate Treasury Fund offers investors a solution that not only could provide a rate hedge but also offers protection for future Fed rate hikes. In the process, as the USFR yield 'floats up with the Fed,' this strategy can also help solve income needs without the duration risk."
USFR has an effective duration of 0.02 years.