Treasury Floating-Rate Notes Offer a Unique Solution for Rising Rates

The Federal Reserve's decision to raise interest rates has put bond investors in a bind. Rising rates typically hurt portfolios, but there is an overlooked instrument that can adapt to changing short-term rates: Treasury floating-rate notes, or FRNs.

FRNs are two-year maturities with interest payments that reset weekly based on the 13-week Treasury bill auction rate plus a fixed spread established when the note is issued. This makes them particularly useful when short-term rates are rising or remaining elevated.

The WisdomTree Floating Rate Treasury Fund (USFR) is one way to access this part of the Treasury market without having to buy individual securities and manage the resets themselves. USFR tracks the Bloomberg U.S. Treasury Floating Rate Bond Index, giving investors a portfolio of U.S. government FRNs with an effective duration of just 0.02 years.

With its low expense ratio of 0.15% and monthly distributions, USFR becomes particularly useful in a higher-for-longer interest rate environment. While it may not provide the best returns when rates are falling, its Treasury credit quality and almost zero duration risk make it an attractive option for investors seeking minimal interest-rate sensitivity.