Protect Against Rising Interest Rates With Fix-To-Float Bonds

Investors fear higher interest rates. So much that their piles of cash in money markets and banks are overflowing. All the TV and print media gurus have so far been wrong about interest rates. Most called for much higher rates since the year began. We’re not there yet.

Rather than be fearful, invest in some fix-to-float bonds. Should the prophets somehow get it right and rates rise significantly, you will participate in that interest rate trajectory.

We recently invested in a fix-to-float bond issued by Western Alliance Bank. They are a full-service bank covering Nevada, Arizona, and California. These Western Alliance subordinated bonds (CUSIP: 95763PEF4) are rated Baa2 by Moody’s
. The coupon is 5.25% and is fixed until June 1, 2025. Based on the most recent trade of 111.30, this is 2.057% yield to the June 1, 2025 call. If the company does not call the bonds on June 1, 2025 then the coupon starts to float (change) to 5.12% plus 3-month SOFR (SOFR replaces Libor on January 1, 2022 as the preferred index). So, no matter how low or high SOFR goes, as an investor you will earn the fixed 5.12% plus the 3-month SOFR rate.

Here’s the catch: If Western Alliance Bank calls the bonds on June 1, 2025, investors won’t benefit from the floater component.

Another catch is the $100,000 minimum denomination to purchase these particular fix-to-float bonds. But hey, you are Forbes readers! Just peel off a few of those QQQs or Dow Diamonds
you own to pony up the minimum. Occasionally, odd lot liquidations of fix-to-float bonds appear on financial platforms. Observant investors can scoop these up without having to buy the 100,000 minimum. Beware too, some platforms may not offer fix-to-float bonds at all.

If you think this requires extra effort, you are correct. This may force you to do business the old-fashioned way—call a broker. There are many brokerage firms that traffic in fix-to-float bonds. Not all have minimum denominations.  

Insulate your portfolio if the gurus should somehow get their calls for much higher interest rates correct. Fix-to-float bonds may be a valuable addition to your investment strategy.

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