One of the most common questions we receive from advisers is whether to use floating rate or fixed rate bonds in their client’s portfolios.
We look at 3 key considerations to help you with this decision.
1. The Range
Within the fixed income universe the large majority of bonds have fixed coupons. Floaters are mostly higher-rated bank bonds with lower yields. Bonds with higher yields tend to be non-bank and fixed-rate.
So irrespective of fixed v. floating, lower-rated names like Alumina or Downer should have higher yields than NAB or BoQ.
View the range of XTBs.
2. Your Investment Timeframe
Floaters have lower volatility, which may suit short-term investments as an alternative to cash. If you are intending to hold to maturity and happy with the credit risk
, then fixed-rate bonds with longer duration should have higher yields.
3. Your view on Interest Rates
Floaters essentially take rate risk off the table. However, if held to maturity, the returned capital from bonds is impervious to yield changes. In addition, rolling over into new fixed-rate bonds should be cheaper if yields increase.