Treasury Floating Rate Notes Explainer
Treasury Floating Rate Notes, or FRNs, are two-year marketable U.S. government securities with interest payments that change over time. Their rate combines an index tied to recent 13-week Treasury bill auction results with a fixed spread established when a new FRN is auctioned.
The index resets weekly, while interest is paid quarterly. The fixed spread remains with the security for its life. Because the coupon adjusts toward current short-term rates, an FRN generally has less price sensitivity to rate changes than a fixed-rate note of similar maturity, although its market price can still move.
Investors may buy FRNs at auction or in the secondary market. Price, accrued interest, remaining maturity, the fixed spread, and expectations for future bill rates all affect yield. A discount margin is a market measure used to compare the security’s floating cash flows with its price.
FRNs are backed by the full faith and credit of the U.S. government, but income can fall when short-term rates decline. Selling before maturity can produce a gain or loss, and inflation can exceed the floating return. Interest is federally taxable but generally exempt from state and local income taxes.
Recent 13-week bill rates provide the changing index.
A fixed auction spread is added.
The rate updates more often than cash is distributed.
Contract rules determine each payment period.
FRNs still respond to spreads, liquidity, and expected short-term rates.
Income can fall when policy rates decline.
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