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

Why the Bid-to-Cover Ratio Rose for 2-Year Floating Rate Notes Auction


Nov. 20 2020, Updated 5:05 p.m. ET

Two-year floating rate notes

The US 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 like LIBOR (London Inter-Bank 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 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. ETFs like the iShares Floating Rate Bond ETF (FLOT) provide exposure to FRNs.

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Key takeaways

  • The auction was held on April 28, 2016.
  • $15 billion worth of FRNs were auctioned in April, $2 billion higher than March’s auction.
  • The high discount margin came in at 0.19% in the April auction, lower than the 0.24% in the previous auction.

Bid-to-cover ratio

The bid-to-cover ratio jumped 16.3% to 3.6x compared to 3.1x at April’s auction. FRNs are preferred in the rising interest rate environment. With the expectation that the Federal Reserve may raise interest rates by mid-2016, investors flocked to two-year FRNs and thus overall demand jumped.

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Market demand rose

Market demand rose to 53.2% of the accepted competitive bids in April compared to 44.4% in March’s auction.

The percentage share of direct bidders dived from 3.2% in March to nothing in the April auction. Direct bids include bids from domestic money managers like State Street (STT) and American International Group (AIG). Indirect bids include bids made by foreign central banks and indicate overseas demand. They rose, making up 53.2% of the auction in April as compared to 41.2% a month ago.

Due to a rise in the market demand, primary dealer takedown fell to 46.8% compared to 55.6% at March’s auction. Primary dealers act as market makers. They take up an excess supply of auctioned securities. They include firms like Morgan Stanley (MS), Citigroup (C), and JPMorgan (JPM).


Floaters see their interest rate payments rising in a rising interest rate environment, and 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 onwards, we’ll analyze the Treasury bills auction activity last week.


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