As Australia’s interest rate landscape continues to shift in 2025, savvy investors are searching for ways to shield their portfolios from the volatility. Floating rate notes (FRNs) are surging in popularity, offering a compelling blend of flexibility, yield, and protection against rate hikes. But what exactly are FRNs, and how do they fit into the modern Australian investment strategy?
What Are Floating Rate Notes?
Floating rate notes are a type of debt security—think of them as a cousin to fixed-rate bonds. The key difference: FRNs pay a variable interest rate, typically linked to a benchmark like the Reserve Bank of Australia’s (RBA) cash rate or the 3-month Bank Bill Swap Rate (BBSW). As these benchmarks rise or fall, so do the interest payments to investors.
- Structure: FRNs usually have maturities of 2–5 years, and interest is paid quarterly or semi-annually.
- Coupon resets: The interest (coupon) rate is recalculated at each payment interval, based on the prevailing benchmark plus a fixed margin.
- Issuers: In Australia, major banks, government agencies, and blue-chip corporates frequently issue FRNs.
For example, if you invest in a $100,000 FRN with a coupon set at the 3-month BBSW + 1%, and the BBSW is 4.35% (as of Q1 2025), your next interest payment will be based on 5.35% annualised.
Why FRNs Are Gaining Traction in 2025
With the RBA maintaining higher cash rates to combat persistent inflation, traditional fixed-rate bonds have lost some lustre. Their fixed payouts become less attractive as new issues offer higher coupons. This is where FRNs shine:
- Interest Rate Protection: As rates climb, so do FRN payments. Investors aren’t locked into yesterday’s low rates.
- Reduced Price Volatility: Because their coupons adjust upwards with rates, FRNs’ market prices tend to be more stable than fixed-rate bonds, which can lose value in a rising rate environment.
- Inflation Hedge: While not a pure inflation-linked product, rising rates often coincide with higher inflation, meaning FRNs can help preserve purchasing power.
- Liquidity: Many ASX-listed FRNs can be traded on the secondary market, offering flexibility to retail and institutional investors alike.
In 2025, leading Australian fixed income funds have increased their FRN allocations, and new retail-focused ETFs are bringing FRN exposure to everyday investors. For example, Betashares’ Australian Bank Senior Floating Rate Bond ETF (QPON) has seen record inflows as investors shift from term deposits and traditional fixed-rate bonds.
Key Considerations Before Investing
Despite their advantages, FRNs aren’t a silver bullet. Here’s what to weigh before adding them to your portfolio:
- Credit Risk: FRNs are only as safe as their issuer. Major banks and government-backed notes carry lower risk than corporate FRNs.
- Spread Risk: The fixed margin above the benchmark (the “spread”) is set at issue. If credit conditions worsen, this spread may not compensate for increased risk.
- Market Liquidity: While many FRNs are liquid, some smaller issues can be harder to trade, especially in stressed markets.
- Taxation: FRN interest is taxed as income, so tax efficiency should be considered in your investment strategy.
It’s also wise to consider how FRNs fit within your broader asset allocation. They work well alongside other floating and inflation-linked products, cash, and even equities, smoothing out the impact of rate moves on your overall returns.
How to Access Floating Rate Notes in Australia
Australian investors have several paths to FRN exposure in 2025:
- Direct Purchase: High-net-worth individuals and SMSFs can buy FRNs directly through brokers or via new-issue syndications.
- Managed Funds: Many fixed income funds now allocate a portion to FRNs, with some dedicated FRN funds available from leading asset managers.
- ETFs: FRN-focused ETFs listed on the ASX offer a diversified, low-cost way to tap into this market segment.
Major brokers and online trading platforms are making it easier than ever to compare FRN offerings, track benchmark rates, and assess credit quality in real time.
The Bottom Line
Floating rate notes offer Australian investors a powerful tool for navigating today’s higher interest rate environment. By providing income that rises with benchmark rates, FRNs help preserve capital value while cushioning against inflation and volatility. As 2025 unfolds, expect FRNs to play an even bigger role in both retail and institutional portfolios across Australia.
