Impacts on Australian FRNs

I am a subscriber and would appreciate your valuable opinion on the following scenario:

  • final QE tapering in October
  • reversing the QE program by unwinding the Bonds the US Fed holds
  • US interest rise in 2015, probably June quarter
  • upward pressure on US and global Bond yields
  • mixed outlook on Australian Banks by analysts
  • the possibility of the RBA tightening in mid to end 2015

What impact may above scenario have on Australian FRN’s?

I am holding MBLHB, NABHA, ORGHA, SCWPA, WOWHA and CWNHA among other positions in my SMSF, which is in the Pension phase.

A: Thanks for the question and very plausible scenario.


FRNs in general should not be impacted by a rise in interest rates (as per the scenario you outlined.) However, it is possible that spreads may move out a little if the market starts to feel that higher rates are here to stay, sending FRN prices lower (the opposite of the yield squeeze we have had over the last 18 months or so).


In terms of the individual FRNs in your portfolio, capital or other credit issues could also impact their prices. My sense is that this is unlikely.


Bottom line - I think the impact, if any, will be minimal.



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