Muni Floating-Rate Notes and Rising Rates

Boston - As short-term rates move higher and the Treasury yield curve flattens, many investors are thinking about how to earn income while also protecting themselves against rising rates.

In this post, we'll discuss why municipal floating-rate notes -- an often-overlooked part of the market -- may be an attractive option for these investors.

Fed hikes in focus

Rising expectations of Federal Reserve rate hikes following the strong August employment report have put even more focus on the front end of the curve recently.

For example, markets have been expecting a hike at the upcoming Sept. 26 Fed meeting and according to the latest reading from the CME's FedWatch Tool, the market is now pricing in about an 80% chance of another rate hike, at the December Fed meeting.1

And with the Treasury curve flattening, some investors are favoring bonds at the front end of the curve that have seen their yields rise recently, but still have less rate risk than long-duration bonds.

What are muni floating-rate notes?

In municipal bonds, the front end of the curve has been particularly popular with investors seeking tax-free income. However, this popularity has caused short-duration muni bonds to become rich relative to Treasury bonds of similar duration.