Uncle Sam is about to make some bonds more flexible. The US Treasury is preparing to introduce a new type of government bond with an interest rate that can rise after investors buy the bond. That feature makes the investment more attractive now, as investors expect today’s extremely low interest rates to be on the rise in coming years.
The new type of bond, called floating-rate notes (FRNs), are scheduled to be introduced in January 2014. Initially, FRNs will have two-year maturities. And the interest rate will be reset weekly, somewhat above the interest rate for three-month Treasury bills, which was recently 0.04%. FRNs might serve as an alternative to money-market funds for very risk-averse investors. Investors will be able to use the TreasuryDirect program (TreasuryDirect.gov) to purchase FRNs in amounts of at least $100.
FRNs are the first new type of security from the Treasury since 1997, when Treasury Inflation-Protected Securities (TIPS) were introduced, and the first with a floating rate, although corporations have issued FRNs for years. The interest on both FRNs and TIPS is exempt from state and local taxes.
The idea of rates that adjust has caught on with investors. For example, one of the most popular nongovernment bond investments lately has been floating-rate bank-loan funds, which fared relatively well in June when many other kinds of bond funds suffered because interest rates jumped. Interest rates on the loans that the funds invest in typically reset every 90 days.
