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2-Yr FRN Note Auction  
Released On 1/29/2014 11:30:00 AM For 1/29/2014 11:30:00 AM
Auction Results
Total Amount$15 B 
Discount Margin0.045 %

Results are very solid for the Treasury's inaugural 2-year floating rate note auction. Coverage came in at 5.67 with the discount margin at 0.045 percent which, in a sign of strength, is below expectations for 0.054 percent. Dealers were very active bidders, taking down 53 percent of the $15 billion offering. The Treasury market is steady, showing little initial reaction to today's results.

A FRN (floating rate note) is a security that has an interest payment that can change over time. As interest rates rise, the security's interest payments will increase. Similarly, as interest rates fall, the security's interest payments will decrease. The FRN is the first addition to the Treasury's offerings since inflation protected notes were introduced in 1997. Floating rate notes offer investors a chance to gain yield when interest rates rise and with short-term interest rates very low at the time of the introduction, they offer investors a low risk, high quality alternative to Treasury bills and their associated rollover costs.

For the Treasury, the notes will help it attract new investors and, as a funding substitute to T-bills, will help limit its short-term cash needs. The notes also limit rollover risk, that is the Treasury's dependence on bill holders to rollover their holdings with each new bill issue. But there is risk for the Treasury as substituting 2-year floating notes for short-term bills exposes it to a rise in interest rates, an increase that would increase its borrowing costs. Treasury FRNs will be indexed to the most recent 13-week Treasury bill auction High Rate, which is the highest accepted discount rate in a Treasury bill auction.  Why Investors Care

Data Source: Haver Analytics

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