Fitch on Treasury FRNs
Fitch Ratings published a release entitled, "Money Funds Cautious on Treasury Floating Rate Notes," which says, "The US Treasury's first issuance of a floating rate notes (FRN) failed to attract significant participation from money market funds due to concerns over the US debt ceiling deadline, a low spread and a desire among fund managers to observe how liquidity for the program develops, according to Fitch Ratings. Fitch believes that as the market expands over the next year, and particularly if spreads widen, money fund demand for these securities will increase. In addition, if the FRNs replace some issuance of T-bills as currently expected, money funds are likely to increase allocations to the FRNs. Treasury FRNs held by taxable money funds at the end of January make up only 0.07% of the funds' assets. Crane Data, LLC data shows that as of the end of January money funds held $1.7 billion, or 11.2%, of the $15 billion of first issuance. However, demand from other investors was very strong with the bid-to-cover ratio at 5.67 times higher than the typical ratio for Treasury auctions. 21 US money funds sponsored by 10 different managers participated in the first auction of the FRNs. While the average allocation to Treasury FRNs for these funds was 1.1%, it ranged from a low of 0.3% to a high of 4.0%, indicating varying attitudes even among participants. Fitch learned via discussions with fund sponsors that managers are not in a rush to buy Treasury FRNs, and would instead like to see how the market develops, particularly with regards to liquidity. The 4.5 basis point spread over the three-month T-bill set at the first FRN auction was low compared to initial expectations and further reduced money funds' urgency to buy.... An important consideration for buying Treasury FRNs is the effect of these securities on a fund's weighted average life (WAL), as money fund portfolios are limited to a WAL of 120 days."
