Floating-rate bonds can provide investors with an end-run strategy around the threat of rising interest rates, according to John Lekas, manager of the Leader Short Term Bond Fund Ticker:(LCCMX).
Mr. Lekas, who manages the $300 million strategy at Leader Capital Corp., has positioned his fund for a rising-rate environment by building a 44% position in bonds that have yields that adjust in relation to the London Interbank Offered Rate.
“The environment for floating-rate notes hasn't been this good since [former
Federal Reserve Chairman Paul] Volcker started raising rates in the 1980s,” Mr. Lekas said.
The reference is to an historic interest rate cycle between 1979 and 1981 when the Fed increased rates to 20% from 11% as part of a strategy to end
stagflation in the United States.
Mr. Lekas doesn't anticipate such a radical rate hike cycle right now, but he pointed out that rates are currently near zero and haven't been increased in more than two years.
Floating-rate notes are ideal whether the economy improves and growth returns or deteriorates and the dollar loses more value, because he expects the Fed to raise rates, he said.
“As Libor rises, investors will see both a pay increase and price appreciation,” Mr. Lekas said.
The average duration of the floating-rate bonds in the fund is three years, and the average yield is 1.8%.
According to Mr. Lekas, the “double whammy” of his strategy is that as rates rise, there will be an increase in both the yield and price of the bonds.
“If you think rates are rising, this is a great strategy,” he said.
Mr. Lekas started moving into floating-rate bonds a year ago, near the stock market's bottom point.
In addition to the floating-rate bonds, the portfolio also has 30% allocation to cash and a 26% allocation to corporate bonds.
Mr. Lekas describes the low-risk strategy as an alternative to money market funds, many of which are yielding less than 25 basis points.
This year through Friday, the Leader fund had gained 1.3%.
The fund posted a gain of 12.6% last year.
Leader Capital Corp. manages $440 million in assets.
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