Treasury Floating Rate Notes: Do They Win if the Fed Hikes?

In late April 2026, Lena and her brother Rob each put $40,000 into two-year Treasuries. Lena bought the fixed-rate note at the April 27 auction, locking in a 3.812% yield and $1,500 a year in coupon payments. Rob bought the Treasury floating rate note the next day, which started out paying about 3.75%. Six months and one Fed rate hike later, Rob's note is earning around 4.2%, or roughly $1,700 a year at today's rate, and Lena's is still paying exactly what it paid in April. (Lena and Rob are composites, but the auction numbers are real.)

Rob looks like the smart sibling right now. Before you copy him, though, run one more number, because the deal Rob got in April isn't the deal on the table this week.

What the Fed did, and what it hinted at

On September 16, 2026, the Federal Reserve raised its benchmark rate a quarter point to a range of 3.75% to 4%, on a 12-0 vote. It was the Fed's first hike since July 2023, according to Fox Business.

Yesterday, October 28, the Fed held that range steady. The vote was 10-2, and the two dissenters, Governor Lisa Cook and Cleveland Fed President Beth Hammack, both wanted another quarter-point hike now, per the Fed's statement. The statement said inflation is still running above the Fed's 2% goal and that economic activity is expanding at a strong pace. Traders took the hint: by the end of the day, CME FedWatch put the odds of a hike at the December 8-9 meeting at 82.6%, Fox Business reported.

That backdrop explains why floaters are suddenly interesting. When short-term rates are rising, anything that resets with them keeps pace, while anything locked at last spring's rate falls behind.

How a Treasury floating rate note works

A floating rate note, or FRN, is a two-year Treasury whose interest rate moves. According to TreasuryDirect, the rate has two parts.

The first is the index, which is tied to the highest accepted rate at the most recent 13-week Treasury bill auction. Those auctions happen every week, so the index resets every week. The second part is the spread, a small fixed add-on set at the note's original auction. The spread never changes for the life of the note.

Interest accrues daily and gets paid every three months. You can buy as little as $100, in $100 increments, and the interest is subject to federal income tax but exempt from state and local tax. Treasury sells brand-new FRNs in January, April, July and October and reopens them (sells more of the same note) in the other months. Treasury's FRN term sheet adds two details most explainers skip: interest accrues on an actual/360 day count, which nudges the effective yield slightly higher than the quoted rate, and the daily rate can't go below zero.

You can watch the index move with the Fed. At the September 8 auction, the 13-week bill went off at 3.800%. After the hike, the September 28 auction cleared at 4.110%. This Monday, October 26, it came in at 4.050%. Rob didn't have to do anything for his note to pick up that increase. It happened on its own, week by week.

Because the rate keeps resetting, an FRN's price barely moves. When Treasury reopened the July floater on September 23, it sold for about $100.02 per $100 of face value, per TreasuryDirect's auction results. Compare that with a fixed-rate note, which loses market value when rates climb. If Lena had to sell her note early, she'd likely get less than she paid.

The catch: the fixed note already priced in the hikes

Back in April, Rob's choice was cheap. The fixed two-year note yielded 3.812% and the floater started near 3.75%, so he gave up very little to keep his rate flexible. If the Fed had cut, he'd have lost a bit. When it hiked, he won.

This week the gap is much wider. At Monday's auction, the new two-year fixed note sold at a 4.708% yield. On Wednesday, Treasury auctioned $30 billion of a new two-year FRN maturing October 31, 2028, and the spread came in at just 0.038%. Converted the way the term sheet requires, that floater starts out accruing roughly 4.13%, or about 4.19% after the day-count bump.

So a fixed note pays about half a percentage point more from day one. Bond buyers aren't being generous. They expect more hikes, and the fixed yield already reflects them. The bid-to-cover ratio on Wednesday's FRN auction was 3.05, meaning investors bid for about three times what Treasury sold, and that demand is part of why the spread is so thin.

The spread has been shrinking all year. The two-year FRN sold in October 2025 carried a spread of 0.190%. January's came in at 0.099%, April's at 0.103%, July's at 0.050%, and now October's at 0.038%, according to TreasuryDirect auction data. Every new buyer is accepting a smaller premium for the same protection.

How many hikes does the floater need?

I ran the numbers on $40,000 held from the November 2 issue date to maturity on October 31, 2028. I assumed each quarter-point Fed move shifts the 13-week bill rate by about a quarter point, starting from Monday's 4.050%, and I treated the fixed note as paying 4.708% simple interest. Real life will be messier, but the shape holds.

The breakeven works out to a 13-week bill rate averaging roughly 4.55% over the full two years, about half a point above where it sits now. In plain terms, the floater wins only if the Fed delivers at least two more hikes fairly soon and then leaves rates up there, or hikes even more. One December hike, the move markets consider likely, isn't enough on its own.

The downside scenario deserves a look too, because floaters cut both ways. The 13-week bill auctioned at 5.240% on July 1, 2024. By December 1, 2025, after a string of Fed cuts, it was down to 3.725%. Anyone holding floaters through that stretch watched their income shrink by about 1.5 percentage points, which on $40,000 works out to roughly $600 a year less. If inflation cools in 2027 and the Fed reverses course, the same thing happens again.

Who a floater makes sense for

I'd think of an FRN as insurance against a Fed that keeps hiking longer than the market expects. It's a fair choice if your biggest fear is locking in this week's rate and watching yields run to 5% or beyond. If inflation keeps surprising on the upside, you're covered automatically, and the note's price should stay close to $100 per $100 if you need to sell early.

Floaters also suit cash you'd otherwise keep rolling in T-bills or a money market fund for the next two years. A floater tracks roughly the same 13-week rate without the chore of rolling bills every few months, and the spread, however thin, is guaranteed for the full term.

The floater makes less sense if you want certainty about your income. Retirees planning a budget around a known interest check usually sleep better with the fixed note. And if you think the Fed is closer to done than markets believe, the fixed 4.708% is the better bet by a few hundred dollars per $40,000.

Plenty of people will split the difference, and I like that. Put half in a fixed two-year note and half in the floater, and you've stopped trying to guess the Fed. If rates rise, half your money keeps up. If they fall, the other half is locked in.

How to buy one

TreasuryDirect lets you place a noncompetitive bid, which means you accept whatever spread the auction sets. The October note issues November 2, so the next chance to buy at auction is the November reopening. You'll get the spread already locked in at Wednesday's auction (0.038%), at whatever price the reopening sets, which will land very close to $100. Treasury publishes each auction announcement about a week ahead.

Most big brokerages also let you bid at auction with no commission, or buy existing FRNs on the secondary market. Holding them at a brokerage makes selling before maturity much easier than it is at TreasuryDirect.

There are also exchange-traded funds that hold nothing but Treasury floaters, such as the WisdomTree Floating Rate Treasury Fund (USFR) and the iShares Treasury Floating Rate Bond ETF (TFLO). Both charge 0.15% a year. The convenience has a price, though. The fee is about four times the 0.038% spread on the new note. On $40,000, you'd pay about $60 a year in fund expenses to own something you can hold directly for free.

Bottom Line

Floating rate Treasuries rose with the September hike, just as advertised, and they'll rise again if the Fed hikes in December. The new two-year fixed note, though, already pays about half a point more at 4.708%, so the floater only comes out ahead if the Fed raises rates at least twice more and keeps them there. Here's what to do before the November reopening:

1. Write down two numbers: the latest two-year note yield and the latest 13-week bill rate. If the fixed yield is still about half a point higher, decide if you're buying a floater as protection or as a bet, because it won't win on rate alone.
2. If inflation running hotter for longer is what keeps you up at night, put some of your two-year cash into the November FRN reopening with a noncompetitive bid at TreasuryDirect or your brokerage.
3. If you'd rather not guess, split it: half in a fixed two-year note, half in the floater.
4. Skip the floater ETFs for money you plan to hold to maturity. A 0.15% fee eats more than the note's entire spread.