uploads/// Year Floating Rate Note Issuance Versus Bid Cover Ratio

Market Participants Make a Beeline for 2-Year Floating Rate Notes


Nov. 20 2020, Updated 4:25 p.m. ET

Two-year floating rate notes

The US Department of the Treasury introduced two-year FRNs (floating rate notes) in January 2014. An FRN is a debt security. Its interest payment varies. The reference for its rate is a benchmark like LIBOR 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.

Mutual funds like the HSBC U.S. Treasury Money Market Fund (HTYXX) and the U.S. Government Securities Ultra-Short Bond Fund (UGSDX) provide exposure to Treasury FRNs.

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Key takeaways

  • The auction was on October 28, 2015.
  • $15 billion worth of FRNs were auctioned in September. This was $2 billion higher than September’s auction.
  • The bid-to-cover ratio rose by 8% to 3.1x—compared to 2.9x at September’s auction. A rise in the bid-to-cover ratio implies a rise in the overall market demand.
  • The high discount margin was higher at 0.17%—compared to 0.12% at September’s auction.

Market demand rose

The market demand rose to 51.7% of the accepted competitive bids in October—compared to 24.7% at September’s auction. The percentage share of direct bidders fell from 2.7% in September to 2.0% in October’s auction. Direct bids include bids from domestic money managers like State Street (STT) and AIG (AIG).

Indirect bids include bids made by foreign central banks. They indicate overseas demand. The indirect bids rose. They accounted for 50.0% of the auction in October—compared to 22.0% the previous month.

Due to a rise in the market demand, the primary dealer takedown fell to 48.4%—compared to 75.3% at September’s auction. Primary dealers act as market makers. They take up auctioned securities’ excess supply. They include Morgan Stanley (MS), Citigroup (C), and J.P. Morgan (JPM).


Floaters see their interest rate payments rise in a rising interest rate environment. In contrast, regular Treasuries fall in value. A rise in rates would affect the overall bond market—including mutual funds investing in Treasuries and corporate bonds.

In the rest of this series, we’ll analyze the Treasury bills auction activity last week.


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