New Floating-Rate Treasury Bonds Issued

By, Zach Brown, CPA, Product Owner, Clearwater Analytics 



The First New Government Security Type in Over 16 YearsOn Wednesday, January 29, 2014, the U.S. Government debuted a new floating-rate treasury security to healthy demand. This is the first new type of security that the government has created since the introduction of Treasury Inflation-Protected Securities in 1997.

Investment professionals flocked to the new two-year floating-rate note (FRN), identifying it as a good way to reduce transaction costs and interest rate risk. With treasury yields rising sharply over the past year, investors have looked to these new securities as a way to avoid the cost of reinvestment and reduce duration risk. Money market fund investors were identified as the main buyers during the first auction of the new floating-rate notes. However, Clearwater has already seen activity on these new securities in separately managed accounts.

The Treasury Department reported that $15 billion of the new notes were successfully issued. The securities mature in January of 2016 with a yield premium of 0.045 percent above the index, which currently sits at 0.055 percent. As expected, the two-year FRNs had a yield below the current two-year fixed-rate notes, enabling lower interest payments for the government.

These new securities disburse quarterly interest payments and each issue will have a float determined by the auction on the most recent 13-week, fixed-rate treasury issue. This will result in weekly changes to the coupon rates and pricing likely near or at par.

The first auction reported a high bid-to-cover ratio relative to historical treasury auctions, which emphasizes the enthusiasm for the new floating rate security. There is uncertainty with the security’s liquidity in the secondary market and whether the initial enthusiasm will continue as more securities are issued. The natural buyers of the debt are expected to include money market funds, central banks, and commercial banks. The Treasury anticipates the auction for more FRNs to be released quarterly in April, July, and October of 2014. However, in response to strong demand, the Treasury has scheduled an additional offering on February 26, 2014, and interested parties are waiting to see if the excitement continues.

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