Direct Bidders Flocked to 2-Year Floating Rate Notes Auction



2-year floating rate notes

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

Mutual funds such as 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 held on February 24, 2016.
  • $13 billion worth of FRNs were auctioned in January, which was $2 billion lower than January’s auction.
  • The bid-to-cover ratio rose by 1.1% to 3.6x compared to 3.7x at January’s auction.
  • The high discount margin remained unchanged at 0.27% in the February auction.

Market demand tanked

Market demand fell to 39.2% of the accepted competitive bids in February, compared to 57.3% in January’s auction.

The percentage share of direct bidders surged from 2.2% in January to 10.0% in the February auction. Direct bids include bids from domestic money managers such as State Street (STT) and American International Group (AIG). Indirect bids include bids made by foreign central banks and indicate overseas demand. They fell steeply, making up 29.2% of the auction in February compared to 55.2% a month ago.

Due to a fall in market demand, primary dealer takedown rose to 60.7% compared to 42.7% at January’s auction. Primary dealers act as market makers. They take up an excess supply of auctioned securities. They include firms such as Morgan Stanley (MS), Citigroup (C), and JPMorgan Chase (JPM).


Floaters see their interest rate payments rising in a rising interest rate environment. This is in contrast to regular Treasuries, which decrease in value. An increase in rates would affect the overall bond market, including mutual funds investing in Treasuries and corporate bonds.

From the next article onward, we’ll take a close look at activity in the Treasury Bills auction last week.


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