Should the U.S. Government Issue Floating Rate Notes?

38 Pages Posted: 24 Apr 2017 Last revised: 24 Feb 2021

See all articles by Jonathan Hartley

Jonathan Hartley

Harvard University, Harvard Kennedy School (HKS), Students

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 10, 2020


Since January 2014 the U.S. Treasury has been issuing floating rate notes (FRNs). We estimate that the U.S. FRNs have been paying excess interest between 5 and 39 basis points above the implied cost for other Treasury securities. We find a strong positive relation between our estimated excess spreads on FRNs and the subsequent realized excess returns of FRNs over related T-bill investment strategies. With more than 300 billion dollars of FRNs outstanding, the yearly excess borrowing costs are estimated to be several hundreds of millions of dollars. To rationalize this finding, we examine the role of FRNs from the perspective of optimal government debt management to smooth taxes. In the model, bills can be cheaper to issue than FRNs, and the payoffs for FRNs are perfectly correlated with future short rates. FRNs can be used to manage the refinancing risk from rolling over short-term debt. We derive conditions under which the issuance of FRNs can optimally be positive.

Keywords: floating rate notes, fixed income arbitrage, tax-smoothing, optimal debt management

JEL Classification: E62, H63, F30, G12, G15

Suggested Citation

Hartley, Jonathan and Jermann, Urban J., Should the U.S. Government Issue Floating Rate Notes? (August 10, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: or

Jonathan Hartley

Harvard University, Harvard Kennedy School (HKS), Students ( email )

Cambridge, MA
United States

Urban J. Jermann (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-898-4184 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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