The US Treasury floating rate note puzzle: Is there a premium for mark-to-market stability?

Matthias Fleckenstein and Francis A. Longstaff

Journal of Financial Economics, 2020, vol. 137, issue 3, 637-658

Abstract: We find that Treasury floating rate notes (FRNs) trade at a significant premium relative to the prices of Treasury bills and notes. This premium is directly related to the near-constant nature of FRN prices and is correlated with measures reflecting investor demand for safe assets. Money market funds are often the primary investors in FRNs, and the FRN premium is related to flows into funds with fixed net asset values, but not to flows into funds with variable net asset values. These results provide strong evidence that the FRN premium represents a convenience yield for the mark-to-market stability feature of FRNs.

Keywords: Treasury floating rate notes; Mark-to-market stability; Asset pricing premia; Convenience yield; Money market funds (search for similar items in EconPapers)
JEL-codes: E41 E43 G12 G23 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:3:p:637-658

DOI: 10.1016/j.jfineco.2020.04.006

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