Demystifying the US Treasury floating rate note puzzle: A swap market perspective

Jungkyu Ahn; Yongkil Ahn

doi:10.1016/j.frl.2022.103362

Demystifying the US Treasury floating rate note puzzle: A swap market perspective

Jungkyu Ahn, Yongkil Ahn

Dept. of Business Administration

Monash University

Research output: Contribution to journal › Article › peer-review

3 Scopus citations

Abstract

We compare two versions of the US Treasury floating rate note (FRN) price measured in Treasury auctions and in the swap market. Utilizing a proprietary dataset from J.P. Morgan, we find that the actual US Treasury FRNs are traded in premium in comparison with their synthetic equivalents in the swap market, and the premium amounts to four basis points on average. Moreover, they are priced up by four more basis points when the aggregate fixed income market is in turmoil, confirming that US Treasury FRNs are indeed safe assets, and thus require a price premium ex ante.

Original language	English
Article number	103362
Journal	Finance Research Letters
Volume	50
DOIs	https://doi.org/10.1016/j.frl.2022.103362
State	Published - Dec 2022

Keywords

Asset swap
Basis swap
Discount margin
Floating rate note
Safe asset

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10.1016/j.frl.2022.103362

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title = "Demystifying the US Treasury floating rate note puzzle: A swap market perspective",

abstract = "We compare two versions of the US Treasury floating rate note (FRN) price measured in Treasury auctions and in the swap market. Utilizing a proprietary dataset from J.P. Morgan, we find that the actual US Treasury FRNs are traded in premium in comparison with their synthetic equivalents in the swap market, and the premium amounts to four basis points on average. Moreover, they are priced up by four more basis points when the aggregate fixed income market is in turmoil, confirming that US Treasury FRNs are indeed safe assets, and thus require a price premium ex ante.",

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N2 - We compare two versions of the US Treasury floating rate note (FRN) price measured in Treasury auctions and in the swap market. Utilizing a proprietary dataset from J.P. Morgan, we find that the actual US Treasury FRNs are traded in premium in comparison with their synthetic equivalents in the swap market, and the premium amounts to four basis points on average. Moreover, they are priced up by four more basis points when the aggregate fixed income market is in turmoil, confirming that US Treasury FRNs are indeed safe assets, and thus require a price premium ex ante.

AB - We compare two versions of the US Treasury floating rate note (FRN) price measured in Treasury auctions and in the swap market. Utilizing a proprietary dataset from J.P. Morgan, we find that the actual US Treasury FRNs are traded in premium in comparison with their synthetic equivalents in the swap market, and the premium amounts to four basis points on average. Moreover, they are priced up by four more basis points when the aggregate fixed income market is in turmoil, confirming that US Treasury FRNs are indeed safe assets, and thus require a price premium ex ante.

KW - Asset swap

KW - Basis swap

KW - Discount margin

KW - Floating rate note

KW - Safe asset

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JF - Finance Research Letters

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ER -

Demystifying the US Treasury floating rate note puzzle: A swap market perspective

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Keywords

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