Floating Rate Notes experiment

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waldensky
Posts: 25
Joined: Sat Oct 21, 2017 1:09 pm

Floating Rate Notes experiment

Post by waldensky »

Floating Rate Notes.

Wanted to post some details on my experience trying this investment type out.

At TD Ameritrade for this (also have had or have accounts with most other brokers Fidelity, Interactive Brokers, Etrade, Chase, Schwab, Vanguard etc)

Benefits I’m interested in:

Rate risk seems low.

By design the price/market value of an FRN should fluctuate a lot less as rate changes (instead, the coupon fluctuates). I mark to market on my portfolio, that will help keep the portfolio value stable.

Administratively simple - you can do them for 2 year chunks and don’t need to roll a ladder forward.

Note – NOT experienced in these.

Process:
  • I purchased 91282CFS5 through the noncompetitive auction process. For whatever reason, this seems to avoid the approx 0.10% that TD adds into the bid/ask on fixed income treasury trades otherwise so I buy almost all treasuries at auction.
  • To make this experiment interesting, I waited till I could purchase a re-opening FRN. My price was 99.848. That matches the treasury report exactly (no hidden fee).
  • If I hold to maturity the additional discount adds about 0.08% to the yield. But there is a market to market loss (very small).
  • Question: What drives this mark to market movement? I assume this (small) effect is tied perhaps to the shape of the future yield curve or a very near-term expectation on how quickly rates will go up or timing of coupon payments or timing of index rate determination date and reset? Input welcome.
  • I also had to pay for some accrued interest (separately stated). That made sense, but I didn’t expect it (1 month).
  • The current daily index is 4.04%. With the .14% spready my current rate is around 4.18% (I think) If I held to maturity I’d pick up that addi tional 0.08% to 4.26%.
  • Bid / Ask spreads. I’ll update this when market opens. They must be reasonably big or the rate above would seem to be too good. If they are big, there is a cost in terms of getting out.
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Kevin M
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Re: Floating Rate Notes experiment

Post by Kevin M »

We had a discussion about this a few months ago, and it appeared that FRNs are not available at the big three brokers. Here is what I see at Fidelity when I search for your CUSIP:

Image

See the small note below the Description column header?

I don't recall seeing them available at auction at Fidelity either, but I haven't really paid much attention to auctions.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
livesoft
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Re: Floating Rate Notes experiment

Post by livesoft »

FLRN is an ETF in this space.
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Geologist
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Re: Floating Rate Notes experiment

Post by Geologist »

To supplement Kevin M’s remarks:

The Treasury market overall is an institutional market. It is particularly so for Floating Rate Notes. For the re-opening issue the OP just purchased, competitive bidders (institutions) bought $21.9 billion and non-competitive bidders (OP and other individuals) bought $69 million. So individuals purchased 0.3% of the issue. Non-competitive bidders bought an even smaller percent of the original auction of this FRN. (For comparison, non-competitive bidders bought about 2% of the most recent two-year Treasury notes and around 4% of the most recent 13-week bill.)

This implies that the secondary market for individual-sized quantities is going to be limited and, as Kevin M indicates, Fidelity is not currently offering it. There may be a bid-ask spread for institutional quantities (the standard Treasury block is $1 million, according to Annette Thau), but this won’t be relevant to the individual.
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jeffyscott
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Re: Floating Rate Notes experiment

Post by jeffyscott »

waldensky wrote: Wed Nov 23, 2022 11:33 pmIf I hold to maturity...

...Bid / Ask spreads. I’ll update this when market opens. They must be reasonably big or the rate above would seem to be too good. If they are big, there is a cost in terms of getting out.
As implied by Kevin and Geologist and from couple past discussions of these, I think you may find that you will pretty much have to hold to maturity. I think at least one person reported that they had to call if they wanted to attempt to sell and if successful it would probably happen at a bad price.

Individuals would probably do better by either rolling their own short term bills, buying a fund/ETF, or buying a normal treasury that matures at the same time as the FRN.
And so it goes, And so it goes, And so it goes, And so it goes, But where it's goin' no one knows
Topic Author
waldensky
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Re: Floating Rate Notes experiment

Post by waldensky »

Thanks for the feedback! This is very helpful and is a big negative to a product that I otherwise find attractive.

I actually used FLRN in another account - but noticed what I thought was a bit of premium going directly with FRN's. I should have posted here FIRST before trying my experiment!!

Part of me feels there must be an arbitrage opportunity in all this, but if market is not automated may not be able to automate keeping spreads down.

As a point of reference, I requested a bid for a sale today - definitely less liquid. I normally get a timely quote. This one is hung so far. So doesn't look easy to get out of the position :o! That is very much less than ideal as I wanted this pretty liquid. :oops:

I will call in next week and see what I can do if anything. The bad news is I went in reasonably big at 700K. Good news is I won't roll my December ladder rollover into this which would have made this very meaningfully worse.

Well, I learned something here for sure! I was doing the treasury ladder thing 1 year out with 4 steps (so every three months I'd do another 1 year). My instinct is FLRN is probably the closest to want I want to accomplish or go back to my ladder approach.

Thanks folks!
xenial
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Re: Floating Rate Notes experiment

Post by xenial »

waldensky wrote: Fri Nov 25, 2022 11:51 amWell, I learned something here for sure! I was doing the treasury ladder thing 1 year out with 4 steps (so every three months I'd do another 1 year). My instinct is FLRN is probably the closest to want I want to accomplish or go back to my ladder approach.
Have you considered TFLO, the iShares Treasury Floating Rate Bond ETF? FLRN invests mostly in corporates, with some supranationals and foreign agencies, but no US Treasuries. TFLO seems much more similar to your Treasury ladder approach. Of course FLRN is higher yielding, since it has credit risk.
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