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Fitch Ratings Report Finds Treasury FRNs are an Attractive Option for Money Market Funds

February 8, 2014

The U.S. Treasury's new floating rate note (FRN) program would provide additional investment options for short-term investors and money market funds at a time when the supply of other money market securities is declining, according to Fitch Ratings.

According to a release, the Treasury announced that it will offer $15 billion of the two-year FRNs at the program's first auction on January 29.

The initial issue is expected to be welcomed by short-term investors as market and regulatory developments are reducing the supply of other short-term instruments. Treasury has been cutting its issuance of short-term T-bills as it seeks to extend the average maturity of the government's debt. These dynamics will likely lead to strong demand from money market funds that invest in government debt, as they must replace maturing T-bills. Lesser demand is expected from prime money market funds, which can also invest in bank and corporate securities, and have also seen the supply of these instruments shrink.

Fitch considers the two-year FRNs as eligible securities for 'AAAmmf'-rated money market funds. The interest paid on the FRNs is based on the three-months T-bill auctions, and resets daily. This daily reset feature should be attractive from the perspective of a fund's weighted average maturity (WAM), which is limited to 60 days under Fitch's criteria for 'AAAmmf' funds.

The two-year maturity of the FRNs is consistent with Fitch's eligibility criteria for rated money funds, but will constrain the amount of the security that any money fund can buy. 'AAAmmf'-rated fund portfolios are limited to a weighted average life (WAL) of 120 days. Hence, allocating even 10 percent of a money fund's assets to the two-year FRN will set the WAL at 73 days, before taking account of the other 90 percent of the portfolio. Fitch-rated U.S. government money funds had an average WAL of 51 days as of the end of December, so allocations to the FRN of more than 10 percent of a fund's assets are unlikely.

Nevertheless, the expected incremental spread to T-bills will likely generate significant demand for the FRNs among money market funds and other conservative short-term investors, providing for good liquidity of the instrument. Fitch will include FRNs maturing between one and two years toward rated money funds' weekly liquidity calculations, while FRNs and other Treasury securities maturing in less than one year are counted towards daily liquidity calculations. 'AAAmmf'-rated funds must maintain daily and weekly liquidity buffers of 10 percent and 25 percent, respectively.

Additional information, including on Fitch's rating criteria for money market funds, is available at

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings.

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