Treasury FRNs

[yogibearbull]

Treasury FRNs

There is growing interest in Treasury FRNs. These didn’t do much during the ZIRP, 2020-22, but have done well after 2022 as interest rates rose.

The 2-yr Treasury FRNs pay the yield of 3-mo T-Bills (reset weekly) plus spread (set at the Auction). The interest accrues daily but is paid quarterly. These require less frequent rolling than 3-mo T-Bills. Auctions (original issue or reopening) are monthly. Among the brokers, Schwab accepts online orders, but you will have to call Fidelity’s fixed-income desk to enter Auction or secondary market orders.

The next Treasury FRN Auction (reopening) is on Wednesday, 8/23/23.

The ETFs are TFLO, USFR; both have 15 bps ERs

These can be good supplements for T-Bills or money-market funds.

Don’t confuse these with regular FR/BL funds that are junk-rated/HY. In between are the investment-grade corporate floating-rate notes.

[django]

The "spread" between what?

[yogibearbull]

Spread over 3-mo T-Bills.

So, 2-yr Treasury FRNs yield = 3-mo T-Bills (reset weekly) + spread (set at the Auction).

In 2023 YTD, the spread has the range 12-20 bps.

Remember that you have to hold these about 2 years although you are getting a variable rate (good when rates are rising or steady). The spread is to compensate for that. The secondary market for FRNs may be thin.

[Fearchar]

Thank-you yogibearbull for pointing out FRN's

Good to know that the spread has been positive this YTD.
However, it's also possible that the spread can be negative.
Depends on the particular auction.

[yogibearbull]

Fearchar, FRN spreads were negative during the much of ZIRP. But they turned positive in mid-2022 and have been positive since. The positive FRN spread now is attractive because the Treasury yield-curve in inverted with 3-mo at 5.56%, 2-yr 4.94%. So, there is a penalty in going from 3-mo to 2-yr with the nominal Treasuries (some say that this means that the rates may fall soon), BUT with the FRNs, there is a small positive spread for going to 2 years and still getting the current 3-mo T-Bill rates (daily accruals, weekly rate resets, quarterly interest payments).

In the Treasury announcement for 8/23/23 auction, the indicated spread is +12.5 bps.

[Fearchar]

E*Trade offers FRNs, but I'm not seeing them at Vanguard or Schwab.

Have not checked Fidelity.

[yogibearbull]

Fearchar , I already entered an order for FRN Auction on Wednesday - look for 1 yr, 11 mo Notes and check the CUSIP 91282CHS3. The "FRN" name is not used by Schwab.

It isn't shown online at Fido or Vanguard. A Fido rep on another platform indicated that you just have to call Fido for FRN Auctions (I think a poster here, anitya?, also indicated this some time ago) . Don't know about availability at Vanguard.

Treasury Announcement for FRN/1y-11m Note www.treasurydirect.gov/instit/annceresult/press/preanre/2023/A_20230817_2.pdf

[anitya]

Aug 18, 2023 11:56:29 GMT yogibearbull said:

Fearchar , FRN spreads were negative during the much of ZIRP. But they turned positive in mid-2022 and have been positive since. The positive FRN spread now is attractive because the Treasury yield-curve in inverted with 3-mo at 5.56%, 2-yr 4.94%. So, there is a penalty in going from 3-mo to 2-yr with the nominal Treasuries (some say that this means that the rates may fall soon), BUT with the FRNs, there is a small positive spread for going to 2 years and still getting the current 3-mo T-Bill rates (daily accruals, weekly rate resets, quarterly interest payments).

In the Treasury announcement for 8/23/23 auction, the indicated spread is +12.5 bps.

I think 12.5 bps spread is low / about right considering where we are in the Fed rate cycle.  Not enough to compensate for the liquidity and reinvestment risks.  I would rather take the 26 week or even 1 yr Treasuries.

[bruno]

I dont really like buying a New Issue Tbill not knowing what the rate is going to be in a couple of days and now signup for buying them for the next 2 yrs not knowing?? Probably not for me..

[yogibearbull]

FRN Auction result, 8/23/23, www.treasurydirect.gov/instit/annceresult/press/preanre/2023/R_20230823_1.pdf

Edit/Add. Current coupon 5.425%

[anitya]

Aug 23, 2023 16:21:28 GMT yogibearbull said:

FRN Auction result, 8/23/23, www.treasurydirect.gov/instit/annceresult/press/preanre/2023/R_20230823_1.pdf

Edit/Add. Current coupon 5.425%

So, weekly variable (reference) rate upon issuance is 5.3% and spread is 0.125%, making up the 5.425% you mention?

Like all coupon Treasury bonds, do these bonds also pay semi-annually?  I am presuming one would not know how much interest will be paid until paid because the reference rate changes weekly.

if you know off hand,

why does the USFR index own 4 different issues, is not the reference rate the same for all four of them?

in the last three months before maturity of an FRN, does the reference rate still change weekly?

[yogibearbull]

anitya, yes, current coupon of 5.425% is the FRN index reference rate of 4.30% (set after each 13-wk T-Bill Auction) + 0.125% spread.

FRNs accrue interest DAILY, but it is paid QUARTERLY. It resets weekly on Mondays. Treasury published these index value tables that can be used to estimate values.

USFR owns 4 FRNs with staggered maturities - 10/2024, 01/2025, 04/2025, 07/2025. They will get the same variable FRN index (3-mo T-Bills after Monday Auctions) + possibly different spreads (I haven't checked).

FRN Index Values www.treasurydirect.gov/auctions/announcements-data-results/frn-daily/

[anitya]

yogibearbull, They are different spreads (0.15 - 0.2%) but presumably if they bought them on the secondary market, the market value they paid could reflect a different spread from the stated spread.

Thanks