2018 Economic Calendar
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2-Yr FRN Note Auction  
Released On 1/24/2018 11:30:00 AM For 1/24/2018 11:30:00 AM
Auction Results
Total Amount$15 B 
Bid/Cover3.38 
Discount Margin0.000% 
CUSIP Number9128283T5 
Originally Announced CUSIP9128283T5 

Highlights
Results are soft for the monthly 2-year floating rate note (FRN) auction, where coverage, at 3.38, was below average and end investor demand weak, with non-dealers taking down just 37 percent of the $15 billion offering, their smallest share in a year. The 0.000 percent high margin was 3.5 basis points below last month's margin rate and the lowest margin awarded in at least 4 years.

Definition
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
 
[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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