Tax Advice Santa Rosa – THE TREASURY PLAN TO ISSUE FLOATING RATE NOTES

April 18th, 2013 → 3:56 pm @ // No Comments

What are FRNs, and why is the government moving to offer them?

Floating rate notes are nothing new – Fannie Mae and Freddie Mac have issued them for years, along with foreign banks and some corporations. What is new is the U.S. Treasury’s move to offer these bonds. It plans to do so by Q1 2014.

As the term implies, the yield on a floating rate note adjusts with movements of a benchmark interest rate. Since many types of Treasury bonds have fixed interest payments until maturity, this makes a Treasury-issued FRN an attractive prospect. In their absence, investors are buying fixed-rate Treasuries and using the swaps market to convert them into floating-rate debt.

Interest in FRNs has grown, and so corporations have started to offer or resumed offering them. However, many of these companies have dividends with greater yields, and corporate floaters have no federal guarantee behind them.

If the Treasury joins the ranks of FRN issuers, it will risk having to have to pay bond investors more if interest rates rise. In its estimation, that risk is apparently worth taking.

What will the Treasury use as the benchmark for its FRNs? The LIBOR rate is definitely out, …Read More


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