How Floating Rate Notes Perform When Credit Spreads Widen

Key Takeaways:

• When credit spreads widen, corporate FRN prices may decline temporarily as investors demand greater compensation for credit risk.
• Despite spread-driven volatility, the higher income associated with investment-grade FRNs has historically supported recovery over longer horizons.
• Because FRNs have minimal interest-rate duration, they have typically experienced smaller drawdowns than traditional fixed-rate corporate bonds during rate-driven selloffs.

How Floating Rate Notes Perform When Credit Spreads Widen

Corporate floating Rate Notes (FRNs) are often discussed when talking about interest rate risk, but credit conditions also play an important role in shaping returns. While FRN coupons adjust with prevailing short-term interest rates, changes in credit spreads can affect valuations and introduce short-term volatility.

Interest Rate Sensitivity vs. Credit Sensitivity in Corporate FRNs

FRN coupons reset periodically based on short-term reference rates, which means prices have virtually no sensitivity to changes in interest rates. Investors generally do not experience significant price losses when rates rise, nor do they benefit meaningfully from falling rates through price appreciation.

Credit conditions, however, do matter. The fixed spread over the reference rate compensates investors for credit risk, and changes in issuer creditworthiness or broader market sentiment can affect valuations as market credit spreads move.

What Happens to Corporate FRNs When Credit Spreads Widen?

When credit spreads widen, FRN prices may decline to compensate investors for the higher perceived level of risk. This spread exposure can lead to short-term volatility and drawdowns that are larger than those seen in non-credit-sensitive instruments such as Treasury FRNs or T-bills. However, the higher yield associated with credit exposure has historically allowed investment-grade FRNs to recover and outperform over longer horizons, particularly relative to traditional fixed-rate corporate bonds.

Recent Examples of Spread Widening and FRN Performance

Recent market experience illustrates this behavior. For example, during brief credit-spread widening episodes in 2023 and mid-2025 driven by economic slowdown concerns, IG FRNs experienced limited, short-lived price declines before quickly recovering as corporate fundamentals remained solid.

Although credit spreads can impact valuations, the low interest-rate duration of FRNs helped shield investors from the larger rate-driven drawdowns that can affect traditional fixed-rate bonds during periods such as 2022.

IG FRNs Outperformed (10 Years)

Source: Morningstar Direct, as of 11/30/2025. IG FRNs represented by MVIS US Investment Grade Floating Rate Index, US Treasury FRN by ICE BofA US Floating Rate Treasury Index, IG Corporates OAS (RHS) by ICE BofA US Corporate Index Option-Adjusted Spread.

(Right Hand Side) and IG Corporates by ICE BofA US Corporate Index. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

Corporate FRNs and Drawdowns Over Longer Horizons

Over longer time horizons, the combination of low interest-rate duration and higher income has resulted in more stable return profiles for investment-grade FRNs relative to traditional investment-grade corporate bonds. Historically, this has translated into lower drawdowns and reduced volatility, even during periods of spread widening.

IG FRNs Lower Drawdowns than IG Corporates (10 Years)

Comparing Volatility and Drawdowns Across Fixed Income Segments

Source: Morningstar Direct, as of 11/30/2025. IG FRNs represented by MVIS US Investment Grade Floating Rate Index, US Treasury FRN by ICE BofA US Floating Rate Treasury Index and IG Corporates by ICE BofA US Corporate Index. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

How to invest in FRNs

Investors seeking exposure to investment grade corporate floating rate notes can access the asset class through the VanEck IG Floating Rate ETF (FLTR). FLTR’s underlying index has a bias towards longer-maturity notes, which tend to have greater yield without an increase in interest rate risk.