Are Higher Interest Rates Coming?

Slowly but surely, the market is starting to expect higher interest rates from the Fed.

The first indication appeared in November, when our Depth Charge system detected unusual put buying in an exchange-traded fund that tracks short-term Treasuries. Another indication appeared last week, when investors shifted a record $949 million into mutual funds that own floating-rate securities.

The figure, based on data from EPFR Global, followed another record of $859 million the previous week. Floating-rate notes usually pay interest based on the three-month Libor index, which tends to follow the Federal Reserve's overnight lending rate closely. Investors tend to buy them when they expect short-term rates to increase because their coupon payments automatically adjust higher.

"We expect floating-rate issuance to increase over the year as things improve and the Fed starts moving," said Mirko Mikelic, who overseas $18 billion of fixed income at Fifth Third Asset Management. "It's tough to gauge when that will happen, so people are preparing for that." (more)