Floating Rate Note auctions with a premium of 0.045%

floating rateI won’t be following the Treasury’s Floating Rate Notes (FRNs) because I don’t see them as a logical investment – at least in 2014 – for the small-scale investor. But yesterday’s auction was historic, introducing a new product to the Treasury lineup. And so …

The Treasury’s first-ever two-year FRN, CUSIP 912828WK2, auctioned with a yield premium of 0.045% over the 13-week Treasury. Let me do the math for you:

  • 0.040% = yield on 13-week Treasury
  • 0.045% = the FRN’s yield premium
  • 0.085% = current yield for CUSIP 912828WK2

I seem to say this a lot, but one more time: No one is going to get rich buying FRNs.

As an alternative, you could just roll over 13-week Treasuries and get a current yield of 0.4%, but retain total flexibility if rates rise substantially.

Or, you could buy a 2-year nominal Treasury yielding 0.36%, 27 basis points higher. In fact, if short term interest rates fail to increase more than 27 basis points in the next two years, this FRN is a two-year loser against the 2-year Treasury.

Or, you could buy a two-year insured bank CD and get about 1.15%, meaning that short term rates would have to rise 1.06% to make that FRN pay off.

Or, you could buy a two-year TIPS on the secondary market and get a yield of -1.128, plus inflation. So if inflation averages 2% over two years, you’d get a yield of 0.872%. Plus you’d get two years of inflation protection.

All of these options look more desirable than a two-year FRN, which is designed to meet the needs of massive-scale investors, not the small-scale investor.

One more thing. Keep in mind that FRNs are tied to super-short interest rates, which the Federal Reserve is committed to keeping low into 2016, and TIPS are tied to inflation, which the Fed is committed to raising, right now.

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One Response to Floating Rate Note auctions with a premium of 0.045%

  1. Pingback: Give myRA a Chance

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