Why the floating notes remained in demand despite higher issuance



Last week’s 52 week (or one year) T-bill and two year floating rate note (or FRN) auction

Treasury bills (or T-bills) are short-term debt obligations issued by the U.S. government through a single-price auction, meaning all the competitive and non-competitive bidders are issued T-bills at a yield quoted by the lowest bidder. T-bills are quoted at a discount to face value.

Last week’s T-bill auctions included $25 billion one-month (or four-week) and $25 billion one-year (or 52-week) T-bills auctioned on April 29, plus $25 billion three-month (or 13-week) and $23 billion six-month (or 26-week) T-bills auctioned on April 28. The Department of Treasury also auctioned $15 billion floating rate notes on April 29.

We have already discussed the one-month, three-month, and six-month T-bill auctions in the previous parts of the series. We will cover the one-year T-bill auction and two-year floating rate note auction in this part of the series.

Unlike the one-month, three-month, and six-month T-bills, which are auctioned every week, the one-year T-bills are auctioned every four weeks.

After a drop during February 4 auction, the demand for one-year T-bill recovered over next two auctions. However, the April 29 auction saw the demand diminishing again with bid-to-cover ratio coming down to 4.5x from 4.99x. The bid-to-cover ratio remains near the 2014 average of 4.57x.

While bid-to-cover ratio dropped, the high discount rate also shed 2 basis points to 0.105% from 0.125%, much like the drop in discount rate seen in other T-bill auctions.

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ETFs investing in T-bills are SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL) and iShares Barclays Short Treasury Bond Fund (SHV). Investors looking for short-term investment opportunities like T-bills, but are ready to take higher risk can invest in ETFs like PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT). PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT) invests in short-term securities such as T-bills, commercial papers, mortgage-backed securities, etc. A total of 70% of the fund’s assets are deployed in securities with maturity of less than a year. Financial services firms like Goldman Sachs (GS) and JPMorgan Chase & Co. (JPM) regularly issue short-term securities to meet their short-term funding requirements. Investors looking at a short-term horizon may invest in those securities.

The Treasury department also auctioned $15 billion two-year floating rate notes on April 29. Despite higher issuance compared to $13 billion issuance during March 26 auction, the bid-to-cover ratio remained almost stable at 4.64x versus 4.67x for the March 26 auction. This indicates the strong demand for floating rate notes in an increasing interest rate environment.

Read the next part of the series to know more about last week’s investment-grade corporate bond issuances.


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