Can’t Get Enough Floating-Rate Debt? Big Funds Get Creative

Managers at firms such as J.P. Morgan and PGIM are buying fixed-rate bonds and using derivatives to engineer synthetic floating-rate securities.

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By Eliza Ronalds-Hannon and Sally Bakewell

June 15, 2017 at 8:00 AM UTC

This article is for subscribers only.

This article is part of the June 20, 2017 issue of Markets.

Floating-rate loans are white-hot. Prices are up, and supply is tight as investors seek protection from rising rates. So some of Wall Street’s biggest funds have turned to a workaround: They’re engineering their own floating-rate securities.

Managers at fund companies such as J.P. Morgan Asset Management and PGIM Fixed Income are increasingly mimicking the floating-coupon aspect by buying fixed-rate corporate bonds and using derivatives to hedge out the rate risk. The result is what some refer to as “synthetic floating-rate” securities.

Welcome to a world where investor appetite for loans is chewing up supply, even as takeovers produce fresh deals and borrowers capitalize on demand with a frenzy of repricings. Investors are flocking to floating-rate debt such as leveraged loans because of the potential benefits if the Federal Reserve continues to raise borrowing costs in 2017, as it’s expected to do. For investors, the popularity of these loans means either throwing elbows to get to the front of the line or getting a little creative.