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.


About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
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1 Response to Floating Rate Note auctions with a premium of 0.045%

  1. Pingback: Give myRA a Chance

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