2017 Economic Calendar
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2-Yr FRN Note Auction  
Released On 4/26/2017 11:30:00 AM For 4/26/2017 11:30:00 AM
Auction Results
Total Amount$15 B 
Bid/Cover3.35 
Discount Margin0.070% 

Highlights
Results are solid for the monthly 2-year floating rate note auction, where coverage, at 3.35, was moderate but the bidding tight, pulling down the high margin to 0.070 percent, 1.3 basis points below the 11:30 bid and the lowest discount margin awarded at auction since May 2015. Outsized end investor demand was the driving force of the bidding, with non-dealers taking down 63 percent of the $15 billion offering, their largest share in two years. Strong buying by foreign institutional accounts was also evident, since it was indirect bidders, a category that includes foreign accounts, that took down nearly all of the non-dealer share.

Definition
An 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. Yields on 2-year Treasury FRNs are reset each week to reflect the most recent weekly 3-month (13-week) Treasury bill auction high discount rate. But in addition to the weekly reset 3-month high discount rate, FRN yields include a discount margin (which in the first issue becomes the “spread” that not unlike a coupon becomes fixed to the FRN and is factored in for all subsequent discount margin rates) paid on top of the 3-month high discount rate. FRNs are sold at regularly scheduled public auctions. The competitive bids at these auctions determine the high discount margin for the FRN issue in addition to the 13-week floating high rate. A group of securities dealers, known as primary dealers, are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold the FRNs, resell them to their clients or trade them with other securities firms. Typically, the New York Fed approves about 20 securities firms to be primary dealers but that number dropped sharply during the 2008 financial crisis as some were merged into other firms or went bankrupt. The Fed has been rebuilding that number regularly and the latest list can be found here. Floating rate notes offer investors a chance to gain yield when interest rates rise and offer investors a low risk, high quality alternative to Treasury bills and their associated rollover costs. Original issue 2-year FRN auctions are usually announced in the second half of January, April, July and October, while reopening auctions are announced in the second half of each of the remaining months of the year. 2-year FRN auctions are always held in the last week of each month. Original issue FRNs are issued on the last day of the month, unless it is a non-business day, in which case they are issued (settled) on the first business day of the following month. The reopenings are issued on the last Friday of the month.  Why Investors Care
 
[Chart]

Data Source: Haver Analytics
 
[Chart]
The chart shows the high discount margin awarded at auctions of 2-year floating rate notes since their introduction by the Treasury in January 2014 and includes the latest auction results. The high margin is determined at the auctions by competitive bidding, and will be received by the investor as a premium added to a floating rate based on the 3-month T-bill discount rate. This discount rate portion of the yield is reset weekly according to the high discount rate awarded at that week's 3-month T- bill auction. In a new issue, the high discount margin becomes the permanently attached spread, indicating the percentage basis points added to the bill rate at each weekly reset. In post-auction trading on the market, the discount margin of the 2-year FRN note is likely to change from the auction rate through price adjustment. At reopening auctions of the 2-year FRN, which are frequent, the initial spread remains, but a different high discount margin may be determined by bidding through price adjustment.
Data Source: Haver Analytics
 

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