This Treasury ETF Resets Its Yield Every Week, So Rising Rates Pay You More

Federal Reserve Chair Kevin Warsh has so far resisted President Donald Trump’s calls for dramatically lower interest rates. After the Fed raised rates by 25 basis points on Sept. 16, taking the federal funds target range to 3.75%-4.00%, Warsh emphasized that the decision was made independently and was necessary to address persistent inflation. Sixteen of 18 Fed policymakers anticipate at least one additional increase before the end of 2026, as of Sept. 24.

Anyone who owned bonds through 2022 should know the basic playbook by now. When interest rates rise, existing fixed-rate bonds become less attractive because newly issued bonds offer higher yields. The longer the bond’s duration, the greater the potential price decline. Treasury bills sit near the opposite end of the spectrum. They mature so quickly that proceeds can continually be reinvested at higher prevailing rates.

There’s also a third option that doesn’t get nearly as much attention: Treasury floating-rate notes, or FRNs. Instead of locking in a fixed coupon, their interest payments automatically reset with short-term Treasury rates. That makes them particularly interesting when the Fed is raising rates.

How Floating-Rate Treasuries Work

Treasury FRNs have two-year maturities, but their interest rates reset weekly based on the most recent 13-week Treasury bill auction rate plus a fixed spread established when the note is issued. That’s the key difference from a conventional Treasury note.

If you buy a fixed-rate Treasury and short-term rates subsequently jump, you’re stuck collecting the old coupon unless you sell. Its market price can fall to compensate new buyers for that inferior yield. With an FRN, the coupon adjusts. As three-month T-bill rates rise, the FRN’s interest rate follows relatively quickly. The opposite is also true. If the Fed starts cutting rates and T-bill yields fall, the income generated by FRNs declines.

That makes floating-rate Treasuries particularly useful when short-term rates are rising or remaining elevated. They combine the credit quality of the U.S. Treasury with minimal interest-rate sensitivity and a coupon that responds automatically to monetary policy.

How they compare with simply rolling three-month T-bills is more nuanced. Both strategies respond quickly to changing short-term rates. An FRN resets weekly to a rate linked to the latest 13-week T-bill auction, whereas an investor rolling T-bills periodically reinvests the entire principal at prevailing auction yields.

Depending on the FRN’s fixed spread, auction dynamics and the path of rates, either can lead by a small amount. I wouldn’t stress too much about that difference. The bigger distinction is between both of these strategies and conventional longer-duration Treasury funds. If short-term rates keep rising, FRNs and rolling T-bills can adapt much faster while experiencing far less volatility.

USFR Makes Floating-Rate Treasuries Easy

The easiest way I’ve found to access this part of the Treasury market is the WisdomTree Floating Rate Treasury Fund (USFR). USFR tracks the Bloomberg U.S. Treasury Floating Rate Bond Index, giving investors a portfolio of U.S. government FRNs without requiring them to buy individual securities and manage the resets themselves. WisdomTree reports an effective duration of just 0.02 years, illustrating how little conventional interest-rate sensitivity the portfolio currently carries.

The ETF charges a 0.15% expense ratio and pays distributions monthly. Its 30-day SEC yield was around 3.7% in September, closely reflecting prevailing short-term Treasury rates after expenses. That’s where I think USFR becomes particularly useful today.

The Fed just raised its target range to 3.75%-4.00%, and most policymakers currently anticipate at least one more increase this year. If that happens, higher three-month T-bill rates should work their way relatively quickly into the coupons on USFR’s floating-rate holdings.

A conventional fixed-rate Treasury ETF doesn’t have that feature. Rising yields can reduce the value of its existing bonds, particularly if it carries meaningful duration. USFR’s extremely low duration keeps its NAV comparatively stable while its income adjusts to the new rate environment.

You also retain one of the useful tax characteristics of Treasury securities. Interest from U.S. government obligations is subject to federal income tax but is generally exempt from state and local income taxes. That can make USFR more attractive on an after-tax basis than similarly yielding bank products or corporate debt for residents of high-tax states.

There is a downside. USFR works in reverse when monetary policy changes direction. If the Fed eventually starts cutting rates, its coupons should reset downward quickly. An investor who had previously locked in an attractive yield on a longer-duration Treasury could continue collecting that coupon and potentially benefit from rising bond prices as yields fall.

That’s why I see USFR as particularly well suited to a higher-for-longer environment. You’re accepting that you haven’t locked today’s yield in for years. In exchange, you’re getting Treasury credit quality, almost no duration risk, monthly income and a coupon structure designed to keep adjusting if short-term rates continue climbing.

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