This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Schwab Says Flight To Floating-Rate Bonds Is Premature

A new report released today by the Schwab Center for Financial Research, a division of Charles Schwab & Co., Inc., cautions investors about the risks of investing in floating-rate bonds too early, noting that short-term, fixed-rate securities may still be the better choice in the current environment. Schwab’s fixed income experts say that by prematurely anticipating a rise in short-term interest rates, investors in floating-rate bonds may inadvertently be giving up current income in exchange for the potential for higher coupon payments down the road.

Floating-rate bonds, also referred to as “floaters,” track changes in interest rates and adjust their coupons accordingly. They tend to perform well when short-term rates rise, but what many retail investors don’t realize is that income from floaters only rises when short-term interest rates increase – not when long-term rates go up alone.

“Will Floating-Rate Bonds Sink Your Bond Portfolio?” is the latest white paper from Kathy A. Jones, vice president and fixed income strategist, and Collin Martin, senior research analyst, both fixed income experts at the Schwab Center for Financial Research. The report’s authors point out that the Federal Reserve’s eventual tapering of its bond purchases will likely have a greater impact on long-term interest rates than short-term rates. The authors do not anticipate the Fed will raise short-term interest rates until 2015 at the earliest, and argue that investors are currently better off buying short-term fixed-rate securities rather than floating-rate securities.

“When used correctly, floating-rate bonds can certainly be additive to a fixed income investor’s portfolio. But we’re finding that many well-intended investors do not have a good grasp of how floaters work in relationship to the Fed, and are inadvertently leaving money on the table as a result,” said Kathy Jones. “We want investors who might be thinking about investing in floaters to understand how they work and to take the time to calculate the income they may be giving up relative to the potential gain.”

1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 17,826.59 +14.40 0.08%
S&P 500 2,091.71 +2.57 0.12%
NASDAQ 5,122.3180 +19.51 0.38%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs