News Summary: Flooding into floating-rate funds
News Summary: Floating-rate funds' popularity surges on rate fears, but they also have risks
SURGING POPULARITY: Investors worried about the prospect of rising interest rates are pouring into floating-rate mutual funds. They invest in corporate bank loans whose interest rates reset every few months, as well as other kinds of debt whose interest rates fluctuate. That means when rates rise, so can the interest payments of floating-rate funds.
WHY THE FEAR: Expectations for continued improvement in the economy mean the Federal Reserve may trim its bond-purchasing program later this year and halt it by the middle of 2014, Chairman Ben Bernanke said on Wednesday. Investors see that as a first step toward a hike in short-term interest rates, which could happen by late 2014 or early 2015. The yield on the 10-year Treasury note has been rising. It hit 2.35 percent Wednesday, its highest level in 15 months
RISKS OF THEIR OWN: Floating-rate mutual funds invest in loans that are often made to companies with weak credit ratings, which raises the risk of default.
