Floating Rate Notes Coming Soon — Are They Any Good?

Written by: Jack Boylan

Well, the idea is undeniably good. With interest rates at historic lows, many investors are jumpy about their bonds. Last spring’s price swoon in the bond market definitely got investor’s attention. Will these new notes help allay some of fear? Probably, but it may be a little early to get too excited. It is interesting that the idea has come to fruition, though, and the first auction is relatively soon. Right now the Treasury is shooting for a late January date. While the details are still to come they have made it official:

Floating Rate Notes (FRNs)

Treasury intends to announce the details of the initial Floating Rate Note (FRN) auction on Thursday, January 23, 2014, with the first auction occurring on Wednesday, January 29, 2014. Settlement of the security will occur on Friday, January 31, 2014.

 The FRN is the first new product that Treasury has brought to market in 17 years. The FRN will have a maturity of two years and Treasury anticipates that the size of the first auction will be between $10 and $15 billion.

Obviously, this is just sticking a toe in the water. Having a maturity of only two years negates an awful large chunk of the attractiveness when it comes to this concept. But still, it should be popular among their target audience, namely pension and mutual fund managers. While some of the fine print on the new issue is yet to come, there are some details on these Floating Rate Notes (FRN) at the Treasury website. It seems that the notes will be tied to the 3 month T-Bill:

Treasury FRNs will be indexed to the most recent 13-week Treasury bill auction High Rate, which is the highest accepted discount rate in a Treasury bill auction.

The new FRN’s will pay quarterly as well, so this new paper should be very easy to follow and will no doubt be popular. Of course, the rates will be all important and it will be interesting how the market prices these initially. If these catch on, it would not be surprising to see them used quite a bit for analysis. They seem custom made for Wall Street prognosticators to site when giving us their “wisdom” for the future.

Why the U.S. would do this is another question entirely. If they were smart, they would be issuing all of the long bonds that they could shove down the world’s throat so as to keep interest payments as low as possible. Washington and smart are not two words that go naturally together, so I many have answered my own question right there. And there is that disturbing thought that they are having trouble and/or are anticipating having trouble unloading their paper and need to boost the attractiveness of the never-ending debt deluge. That’s a discussion for another time. For now, though it seems like an intriguing concept that should find an interested audience. While a two year note hardly seems worth the effort of incorporating a “floating rate”, it’s better than nothing (again with the caveat of how they end up in pricing). The first issue is right around the corner — so we’ll see how things go very soon.


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Floating Rate Notes Coming Soon — Are They Any...

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