Floating-Rate Treasury Securities: A Lucrative Opportunity for Individual Investors

Treasury floating-rate securities, once obscure, have become a hot topic among individual investors this year, thanks to their potential for capitalizing on high short-term rates. These securities, with two-year maturities, offer an attractive alternative to U.S. Treasury bills.

A Unique Investment Opportunity

The key feature of Treasury floaters is their weekly adjustable rate based on the three-month T-bill auction. Currently, the yield on these floaters stands at an impressive 5.4%. As a result, more and more investors are looking to participate in the regular monthly auctions, available through the TreasuryDirect website or various banks and brokerage firms.

The Appeal of ETFs

To cater to the growing demand for floaters, two exchange-traded funds have emerged as popular choices: the WisdomTree Floating Treasury ETF (ticker: USFR) with assets totaling $18.8 billion, and the iShares Treasury Floating Rate Bond ETF (TFLO) with $10.7 billion of assets. Both funds offer a comparable yield of around 5.4% and charge a reasonable annual fee of 0.15%.

Strong Inflows Indicate Promising Prospects

Morningstar reports that these floaters ETFs have witnessed significant inflows throughout the year, with the WisdomTree ETF attracting over $5 billion and the iShares ETF receiving more than $6 billion. Investor interest in these funds is evident as they rank in the top 10 for bond ETF inflows this year.

Next auction is on Nov. 21 and is expected to total $26 billion. There are about $600 billion of the floaters outstanding.

Understanding the Benefits

Investors, including seasoned bond investors, are pleasantly surprised by the unique benefits provided by floaters. Dhruv Nagrath, a director of fixed-income strategy at BlackRock, explains the increasing appeal of these securities.

It is clear that Treasury floating-rate securities present a lucrative opportunity for individual investors seeking high short-term rates. With a variety of investment avenues available, including the popular floaters ETFs, investors can explore this market with ease. Don't miss your chance to capitalize on this thriving sector.

Treasury Floaters: A Safe Haven in the Bond Market

Investor interest in Treasury floaters has surged recently as short rates began to rise in 2022. These unique bonds, introduced by the Treasury in January 2014, offer a yield premium of about 0.15 percentage point above the T-bill rate, resulting in a current rate of approximately 5.4%.

One of the key advantages of Treasury floaters is their ultra-short duration, meaning they reset every week and have a short two-year maturity. This makes them particularly attractive to investors seeking minimal price risk. In fact, this year, the price range for the BlackRock ETF, invested in Treasury floaters, has been only 1%, compared to a much more volatile 25% for the iShares 20+ Year Treasury Bond ETF (TLT).

Kevin Flanagan, head of fixed-income strategy at WisdomTree, points out that Treasury floaters have been one of the few safe havens during the bond market selloff of 2023. Their stability and consistent returns have made them a go-to choice for investors seeking refuge.

One major advantage of investing in floater ETFs is the monthly income they provide, as opposed to semiannual interest payments on traditional bonds. It's worth noting that while interest from these floaters is exempt from state and local taxes, it is subject to federal income taxes, just like all Treasury debt.

As short rates continue to rise and T-bill yields increase, Treasury floaters have seen significant benefits this year. Currently yielding 5.25%, if the Federal Reserve decides to cut short rates in 2024, the rate on these floaters will adjust quickly since it's reset monthly. But for now, Treasury floaters remain a solid choice for investors looking to ride the wave of rising short-term rates.