Treasury floating rate notes and ETFs like the WisdomTree Floating Rate Treasury Fund (USFR ) are often seen as beneficial tools to fixed income investors when yields on U.S. government debt are rising.
Rates have been mostly steady this year. But that hasn’t stopped USFR from notching a small YTD gain. Alone, that’s an impressive feat. USFR still merits consideration because, amid last month’s bond market volatility, it proved durable relative to short duration rivals. Data indicates FRNs have been a corner of the bond market most immune to recent volatility challenges.
“The only sector of Treasuries that has not been subject to this volatility is floating rate notes (FRNs). UST FRNs are reset with the weekly 3-month t-bill auction, plus a [spread. And] as a result, [they’re] anchored by the Fed Funds Rate and not impacted by speculative trading activity,” noted Kevin Flanagan, head of fixed income strategy at WisdomTree. “Thus, tariff uncertainty and recession and/or inflation fears don’t align with the daily trading mechanism that the fixed coupon [maturities confront.”]
USFR Has Other Sources of Allure
U.S. and China have agreed to slash tariffs for 90 days. They’ll meet again to discuss deeper trade accommodation. So some market participants may take their eyes off bonds. On the other hand, it’s always a good idea to have a hedge and a risk-mitigation tool. FRNs and USFR check these boxes..
Speaking of dampening risk, USFR could be an ideal consideration regarding that. That’s because the ETF is less as aggressive from a credit perspective than collateralized loan obligations (CLOs) or junk-rated corporate debt. Those two bond segments could be vulnerable to downside if tariff-related turbulence returns.
[“Ultra-short’ credit and/or CLO instruments can offer somewhat higher yields than Treasury [FRNs. But] there is a reason: potential credit risk. Relatively recently, markets have witnessed a period where the credit component can overtake the duration aspect of a fund, specifically during a risk-off episode,” added Flanagan. [“This] period of negative activity may have been somewhat [short-lived. Yet] investors who put their funds in the ultra-short duration bucket are not expecting to see potential statement risk.”
No Dramatic Income Sacrifice Required
USFR’s risk-defraying properties don’t require investors to dramatically sacrifice income as highlighted by a 30-day SEC yield of 4.28%. Additionally, USFR’s annual expense ratio of 0.15% ($15 on a $10,000 investment) is lower than the fees found on some well-known CLOs and short duration ETFs.
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