Move Over T-Bills, Here Come Floating Rate Corporate Bonds
By Paul Rubillo ·
I was admiring the "Most Active" section on TreasuryBonds.com last night and noticed at the top of the corporate bonds box, Morgan Stanley & Wells Fargo were atop the dollar volume leaderboard. But I saw the term "Float", so I needed to investigate!
It turns out Floating rate corporate bonds pay a coupon that resets periodically (typically quarterly). It's based on a reference rate plus a spread, rather than paying a fixed coupon for the bond's life.
Structural differences between floating and fixed rate corporate bonds
The Morgan Stanley and Wells Fargo notes on the list are both "Float" issues, likely tied to SOFR now that LIBOR has been phased out. That's part of why they show up with heavy day volume: floaters are popular vehicles for institutions parking cash or hedging rate risk, since price volatility is muted compared to a 10- or 30-year fixed coupon bond like the AON's 6.45s. In fact, floaters (2-year Treasury FRNs especially) get compared to T-bills or ultra-short money funds. Institutions use them to earn a bit more yield than cash while keeping price risk minimal.
Why floaters trade differently
Duration is very short (effectively resets to near-zero at each reset date), so they don't move much on Fed news the way long fixed-coupon paper does
They're often bought by money-market-adjacent strategies, banks' own treasury desks, and short-duration bond funds
Credit spread risk still applies so know that the "float" only insulates you from the rate component, not the credit component. If Morgan Stanley's credit outlook worsens, the spread over SOFR that the market demands can still widen and hit the price
Tax treatment
Interest income: Coupon payments on floaters are taxed as ordinary income in the year received, same as fixed-rate corporate bond interest. There is no special floater treatment at the federal level.
Original issue discount (OID): If a floater was issued at a discount, OID rules can require you to recognize some income annually even before you receive cash. This gets more complex on variable-rate debt instruments (VRDIs) than plain fixed bonds.
Market discount/premium: If you buy a floater on the secondary market above or below par, the usual market-discount and bond-premium amortization rules apply. This is the same as any corporate bond.
Capital gains/losses: Selling before maturity triggers capital gain or loss based on your basis vs. sale price. The normal short/long-term rules apply based on holding period.
State tax: Corporate bond interest (fixed or floating) is generally taxable at both the federal and state level.
If only Warren Buffett dipped his toe in the floating rate corporate bond pool, this strategy would have gone mainstream. But in a post-Warren Buffett world, maybe there is a movement to get creative around the short-term that we may have just hit on!