A Brief Note on Floating Rate Notes and Money Market Mutual Funds

Potential purchasers of Treasury floating rate notes include money market mutual funds, which have been paying very low yields lately.  There would appear to be two advantages to them:  (1) FRNs would lessen the funds' frequent need to roll over bills or other short-term paper and (2) they might provide a somewhat higher yield than bills.

Money market mutual funds are supposed to be invested in short-term investments with no market risk.  Apparently, FRNs would qualify.  But one of the arguments for Treasury to issue FRNs is that they would serve to lengthen the average maturity of the public debt.  Obviously, there is some tension here between how the money market mutual funds would look at FRNs and how some argue the Treasury should look at them.

If FRNs were to yield the same as, or lower than, Treasury bills, it would be a reasonable option.  But if they yield higher than bills, the case for them is very weak.  Helping out money market mutual funds is not one of the goals of Treasury debt management, and I would think that the current people in charge of Treasury debt management would want to be careful to avoid any perception that this has become a motivating factor.