Fixed/Floating Interest Rate Parity

We present a new no-arbitrage relation which we denote as fixed/floating interest rate parity. This relation can be viewed as a domestic version of covered interest rate parity. We test this relation using fixed-rate bonds and floating-rate notes in the multi-trillion U.S. agency debt market and document significant violations. These violations are largely unrelated to other arbitrage spreads and measures of intermediary constraints. Instead, they are closely tied to the behavior of money market funds which hold the vast majority of agency floating-rate notes. Our results identify clientele effects as a source of persistent mispricing.