Floating Rate Money? The Stability Premium in Treasury Floating Rate Notes

Matthias Fleckenstein; Francis A. Longstaff

doi:10.3386/w25216

Floating Rate Money? The Stability Premium in Treasury Floating Rate Notes

Matthias Fleckenstein & Francis A. Longstaff

Working Paper 25216

DOI 10.3386/w25216

Issue Date November 2018

We identify a significant premium in the prices of Treasury floating rate notes (FRNs) relative to both Treasury bills and notes. This premium is directly related to the near-constant nature of FRN prices and differs from the liquidity and on-the-run premia in Treasury security prices previously documented in the literature. We find that the premium is related to measures reflecting investor demand for safe assets such as market volatility and flows into money market funds. Ironically, some of the variation in FRN prices may actually be due to changes in the premium for their price stability.

We are grateful for the comments and insights of John Cochrane, Douglas Diamond, Mark Grinblatt, Burton Hollifield, Batchimeg Sambalaibat, Yao Zeng, and seminar participants at the LAEF OTC Markets and Securities Workshop at UC Santa Barbara, and at UCLA. All errors are our responsibility. We received no outside sources of research support for this work. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Francis A. Longstaff
The only source of financial support for this research was my regular salary as a UCLA Faculty Member. No outside financial support for this research was received. No other party had the right to review the results of the paper prior to publication.

In the past three years, I have worked/consulted for the UCLA Anderson School, University of California at Berkeley, Blackrock, PIMCO, Simplex Holdings, CALPERS, Fidelity, Putnam, UBS, and Structured Portfolio Management.
MARC RIS BibTeΧ

Floating Rate Money? The Stability Premium in Treasury Floating Rate Notes

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