Get Paid to Wait for Rising Rates

04/25/2012 11:15 am EST

Focus: ETFs

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

As inflation pushes interest rates higher, floating-rate corporate bond funds will shine, says Bryan Perry, editor of Cash Machine.

We’re talking interest rates with Bryan Perry. Hello, and thanks for being here.

Good to be here, Gregg.

In this kind of environment, what do we do? How do we make any kinds of plays working with the interest-rate environment we’re in?

Yeah…we saw a ten-year bond go under 2% here in January. Typically, you see rates pop when you see the stock market move higher, and we’re not seeing that.

So retail investors are still pretty much hunkered down in interest rates. The only thing going lower than interest rates now is the public opinion of our US Congress. That’s still headed south—a 10% approval rating.

So, nothing is happening there. But a lot is happening in the bond market, and I think it is a good time for investors to look out further and try to look at maybe buying some floating-rate corporate debt here. Two or three reasons why.

We have two forms of inflation that could rear their head here. One is definitely real inflation. CPI is around 3.5%. Gas prices, food prices, taking the dog to the vet…you know, tuition costs, you’ve got doctor bills, you’ve got dentist bills, and just about everything else, music lessons, you name it. It’s all going higher. Household services.

Funny how they say core inflation, right? Ex food and energy, and it’s always kind of funny how that does make its way into the number.

Right.

The other thing is the monetary inflation. We’re printing debt at $100 billion a month. We’re currently at $15.7 trillion, and that number is moving higher every month. That’s going to get kicked down the road until at least after the election. That deal is off the table for a while.

So, what happens if one of these bond options doesn’t go according to plan next year? All of a sudden—and these always happen when the bond markets are closed, you know. You wake up and the bond market is down, you know, like two or three days in a row.

I think it’s a good time to start looking into the floating-rate market on the corporate side, because the corporate bond market is pristine. It’s the best of times right now for corporations. They’ve taken refinance risk off the table by being able to refinance everything at near zero.

So, you have a couple of funds out there in which I’ve invested for clients, as well as recommended to Cash Machine. One is the Nuveen Floating Rate Fund (JRO). It pays around 7.5%. It’s about 30% leveraged, because again they can borrow money at zero, at 1%, and then buy floating-rate bonds.

It’s all tied to Libor, the London InterBank Overnight Rate. That’s really about a quarter of 1%, maybe 30 basis points right now is where it’s trading. Well, if that starts to move higher…

And the Fed is only doing short-term paper right now, but eventually if our balance sheet doesn’t get better at the federal level, then they may have to raise rates to attract money at their one, two-year, three-year, four-year level there, which is really where the majority of our auctions take place. So, I think that’s a real risk out there.

If I can get 7.5% now when the rates are at zero, you’re really getting in at the ground floor… for if and when we see adjustable rates start to become favorable.

The other is the Franklin Templeton Limited Duration Fund (FTF). That’s also a floating-rate fund. These funds, their bond average maturity is around four or five years. It’s not very far out.

So, corporations are willing, they want a low interest rate to borrow money at, and they’re willing to buy adjustable rates. Just like buying a house. You get a much lower entry-level rate, but you take the risk of inflation.

They want to do that, because obviously they’re of the mindset that there’s no inflation out there for years to come, and they will take the 5% money instead of the BDCs, which charge 10% to 12%, for that kind of money. So, it’s just my view that it’s time to start looking at floating rate and start planting those seeds, because that garden is going to bloom one day.

Right. And the corporations, their books are solid, because a lot of the big corporations that are borrowing have already restructured, and they’re set.

US accounting standards. It’s all GAAP accounting, domestic companies. I think it’s really a clean play, and you’re in and out with a click of a mouse.

Related Reading:

Get Paid to Wait for Rising Rates

As inflation pushes interest rates higher, floating-rate corporate bond funds will shine, says Bryan Perry, editor of Cash Machine.

We’re talking interest rates with Bryan Perry. Hello, and thanks for being here.

Good to be here, Gregg.

In this kind of environment, what do we do? How do we make any kinds of plays working with the interest-rate environment we’re in?

Yeah…we saw a ten-year bond go under 2% here in January. Typically, you see rates pop when you see the stock market move higher, and we’re not seeing that.

So retail investors are still pretty much hunkered down in interest rates. The only thing going lower than interest rates now is the public opinion of our US Congress. That’s still headed south—a 10% approval rating.

So, nothing is happening there. But a lot is happening in the bond market, and I think it is a good time for investors to look out further and try to look at maybe buying some floating-rate corporate debt here. Two or three reasons why.

We have two forms of inflation that could rear their head here. One is definitely real inflation. CPI is around 3.5%. Gas prices, food prices, taking the dog to the vet…you know, tuition costs, you’ve got doctor bills, you’ve got dentist bills, and just about everything else, music lessons, you name it. It’s all going higher. Household services.

Funny how they say core inflation, right? Ex food and energy, and it’s always kind of funny how that does make its way into the number.

Right.

The other thing is the monetary inflation. We’re printing debt at $100 billion a month. We’re currently at $15.7 trillion, and that number is moving higher every month. That’s going to get kicked down the road until at least after the election. That deal is off the table for a while.

So, what happens if one of these bond options doesn’t go according to plan next year? All of a sudden—and these always happen when the bond markets are closed, you know. You wake up and the bond market is down, you know, like two or three days in a row.

I think it’s a good time to start looking into the floating-rate market on the corporate side, because the corporate bond market is pristine. It’s the best of times right now for corporations. They’ve taken refinance risk off the table by being able to refinance everything at near zero.

So, you have a couple of funds out there in which I’ve invested for clients, as well as recommended to Cash Machine. One is the Nuveen Floating Rate Fund (JRO). It pays around 7.5%. It’s about 30% leveraged, because again they can borrow money at zero, at 1%, and then buy floating-rate bonds.

It’s all tied to Libor, the London InterBank Overnight Rate. That’s really about a quarter of 1%, maybe 30 basis points right now is where it’s trading. Well, if that starts to move higher…

And the Fed is only doing short-term paper right now, but eventually if our balance sheet doesn’t get better at the federal level, then they may have to raise rates to attract money at their one, two-year, three-year, four-year level there, which is really where the majority of our auctions take place. So, I think that’s a real risk out there.

If I can get 7.5% now when the rates are at zero, you’re really getting in at the ground floor… for if and when we see adjustable rates start to become favorable.

The other is the Franklin Templeton Limited Duration Fund (FTF). That’s also a floating-rate fund. These funds, their bond average maturity is around four or five years. It’s not very far out.

So, corporations are willing, they want a low interest rate to borrow money at, and they’re willing to buy adjustable rates. Just like buying a house. You get a much lower entry-level rate, but you take the risk of inflation.

They want to do that, because obviously they’re of the mindset that there’s no inflation out there for years to come, and they will take the 5% money instead of the BDCs, which charge 10% to 12%, for that kind of money. So, it’s just my view that it’s time to start looking at floating rate and start planting those seeds, because that garden is going to bloom one day.

Right. And the corporations, their books are solid, because a lot of the big corporations that are borrowing have already restructured, and they’re set.

US accounting standards. It’s all GAAP accounting, domestic companies. I think it’s really a clean play, and you’re in and out with a click of a mouse.

Related Reading:

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