Market Demand for 2-Year Floating-Rate Notes Rises in June

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 like LIBOR (IntercontinentalExchange 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.

Market Demand for 2-Year Floating-Rate Notes Rises in June

Key takeaways

  • FRNs worth $13 billion were auctioned in June—the same as in May.
  • The bid-to-cover ratio fell to 3.74x compared to 4.01x at May’s auction.
  • The high margin rate came in at 0.076%, marginally higher than 0.069% at the previous auction.
  • Direct bidder allotments fell again after having risen in May.

Auction analysis

Market demand rose to 57.5% of the accepted competitive bids in June, up from 51.5% at May’s auction. The auction quantum was largely divided between indirect bidders and primary market dealers, with direct bidder allotments falling below the 2% level.

Indirect bids include bids made by foreign central banks and indicate overseas demand. They made up 56.4% of the auction in June as compared to 49.2% a month ago. Direct bids include bids from domestic money managers such as State Street (STT) and American International Group (AIG). They received 1.2% of the auction after having received 2.3% of the auction quantum in May.

Due to the rise in market demand, primary dealer takedown fell to 42.5% from 48.4% at May’s auction. Primary dealers act as market makers. They make up any shortfall in demand for the auctioned securities. They include companies in the S&P 500 Index (SPY) such as Citigroup (C) and JPMorgan Chase (JPM).


Floaters see their interest rate payments rise in a rising interest rate environment. This is in contrast to regular Treasuries, which may lose value. An increase in rates would affect the overall bond market, including Treasuries (TLT) (IEF) and corporate bonds (JNK).

Exchange-traded funds such as the iShares Floating Rate Bond ETF (FLOT) provide exposure to FRNs.

From the next article onward, we’ll look at the primary market issuance of US Treasury bills.