- FRNs, 2-year Treasury investments, have been in the news recently because their yields topped all Treasury investments with terms up to 10 years.
- FRNs are attractive during a time of rising interest rates, especially for cash you know you will be holding for two years.
- But during a period of declining rates – which could be coming – shorter-term investments give you more flexibility, with just a small yield penalty.
On May 31, a typical FRN was yielding about 2.4% while the 10-year Treasury yield had dropped to 2.14%. That means FRNs currently have about a 25 basis-point advantage over a 10-year Treasury. That’s a pretty remarkable example of yield inversion, because the FRN’s base interest rate matches the current 13-week Treasury.