The Treasury recently issued its first floating-rate bonds, with variable interest rates tied to short-term rates. Despite interest from institutional investors, though, floating-rate Treasuries might not meet your needs as an income investment.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, talks about floating-rate Treasury bonds. Dan notes that the first auction went well for the Treasury, but that yields of just 0.045 percentage points above three-month Treasury bill rates won't give investors much return. In fact, with such low yields, the new iShares Treasury Floating-Rate ETF (TFLO) would have trouble paying its 0.15% management fee if iShares hadn't taken a voluntary waiver of those fees. The true test for this and the broader-based iShares Floating-Rate Bond ETF (NYSEMKT:FLOT) will come when short-term rates rise, but for now, low yields are the price you pay for some protection from interest rate increases in the future.