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Market Demand for the 2-Year Floating-Rate Notes Declines Again

David Ashworth

A Contracting Economy Is Pulling Treasury Yields Down

(Continued from Prior Part)

Two-year floating-rate notes auction

The US Treasury introduced two-year floating-rate notes, or FRNs, in January 2014. A FRN is a debt security. Its interest payment varies, hence the name. The reference for its rate is a benchmark such as the LIBOR (InterncontinentalExchange London InterBank Offered Rate) or the three-month Treasury yield. The security’s interest payments rise and fall depending on prevailing market rates. As a result, FRNs have near zero interest rate risk.

Key takeaways

  • FRNs worth $13 billion worth were auctioned—$2 billion less than in April.

  • The bid-to-cover ratio rose to 4.01x from 3.81x at April’s auction.

  • The high margin rate came in at 0.069%—marginally lower than 0.074% at the previous auction.

  • Direct bidders made a comeback after two months in a lull.

Auction analysis

Market demand fell to 51.5% of the accepted competitive bids, down from 63.1% at April’s auction. The auction quantum was largely divided between indirect bidders and primary market dealers, though direct bidders did see some allocation after two months in a lull.

Indirect bids include bids made by foreign central banks and indicate overseas demand. They made up 49.2% of the auction in May as compared to 62.7% a month ago.

Direct bids include bids from domestic money managers including State Street (STT) and American International Group (AIG). They had a 2.31% share of the auction, following a 0.42% allotment in April.

Due to the fall in market demand, primary dealer takedown rose up to 48.4%, up from 36.9% at April’s auction. Primary dealers act as market makers. They make up any shortfall in demand for the auctioned securities. Primary dealers include the S&P 500 Index (SPY) components, Citigroup (C) and JPMorgan Chase (JPM).


Floaters see their interest rate payments rise in an interest rate environment that’s moving up. This is in contrast to regular Treasuries, which may decrease in value. An increase in rates would affect the overall bond market, including Treasuries (TLT) (IEF) and corporate bonds (JNK).

The iShares Floating Rate Bond ETF (FLOT) provides exposure to FRNs.

Next up in this series, we’ll look at important releases that affected Treasuries recently.

Continue to Next Part

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