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2-Yr FRN Note Auction  
Released On 2/21/2018 11:30:00 AM For 2/21/2018 11:30:00 AM
Auction Results
Total Amount$15 B 
Discount Margin0.016% 
CUSIP Number9128283T5 
Originally Announced CUSIP9128283T5 

Results are soft for the monthly 2-year Floating Rate Note (FRN) auction, where coverage, at 2.75, was the lowest in at least four years and the bidding sloppy, pulling up the high margin to the awarded 0.016 percent, about 1 basis point above the 11:30 bid. End investor demand was weak though somewhat stronger than in January, with non-dealers taking down 41 percent of the $15 billion offering. The 0.016 percent high margin was 1.6 basis points above last month's rate but the second lowest in at least four years.

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

Data Source: Haver Analytics
The graph shows the high discount margin for 2-year Floating rate notes as determined by bidding at auctions, and is the return earned by the investor on top of the return from the 3-month T-bill rate, which is reset weekly according to 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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