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

30 Pages Posted: 24 Apr 2017 Last revised: 25 Jul 2019

See all articles by Jonathan Hartley

Jonathan Hartley

Harvard Kennedy School; University of Pennsylvania - The Wharton School

Urban J. Jermann

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

Date Written: July 24, 2019


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. With more than 300 billion dollars of FRNs outstanding, the excess borrowing cost for 2017 is estimated to be about 700 million dollars. We also find some evidence that foreign buyers at auctions are alloted relatively higher amounts as auction dates are closer to the end of the month; suggesting window-dressing motives. 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. Issuance of FRNs can optimally be positive, and this requires that the amount of short-term debt issued is relatively small.

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? (July 24, 2019). Available at SSRN: or

Jonathan Hartley

Harvard Kennedy School ( email )

Cambridge, MA
United States

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Urban J. Jermann (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-4184 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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