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For most current and soon-to-be retirees, generating income in retirement is an all-consuming question. Typical asset allocation strategies advocate the shift from equity-based “growth” securities during working years to fixed-income assets that generate a steady stream of payments on which retirees can depend. With the yield on the benchmark 10-year Treasury note now fixed at a rather unappealing (and taxable!) 3.2%, the current value of traditional fixed-income investments as a tool to finance what could be several decades of retirement is an open question.
Furthermore, with the warning signs of inflation flashing bright red—oil at $110 a barrel and gold at more than $1,500 an ounce—it could even be that fixed income investments will deliver a negative total return in the years ahead, hardly a reassuring prospect for a retiree seeking a secure source of income.
One way of coping with this problem that has so far stayed under the mass market investment radar is a floating rate bond fund. With U.S. interest rates following a downward trend for roughly the past two decades, these funds have understandably failed to generate much investor interest. With rates now having seemingly nowhere to go but up, and a notable lack of attractive alternatives, floating rate bond funds are one of the few, if not the only, fixed-income funds that will provide larger yields if interest rates rise.
There are two types of floating rate bond funds. One invests in high quality, investment grade floating rate notes issued by banks and other financial services companies. Their holdings tend to be fairly short in maturity, often less than three years. Others invest in bank loans made to sub-investment grade companies, and hold securities with longer maturities and higher yields.