Bloomberg News

U.S. Treasury Studies Floating-Rate Benefit, Decision Later

May 02, 2012

The U.S. Treasury Department said it sees benefits in the issuance of floating-rate notes, while a decision will be made “at a later date.”

The government also said it plans to sell $72 billion in notes and bonds at next week’s quarterly refunding. The Treasury intends to auction $32 billion in 3-year notes on May 8, $24 billion in 10-year notes on May 9 and $16 billion in 30-year bonds on May 10.

“Treasury believes that there are benefits to issuing floating-rate notes,” the department said in a statement today and it is analyzing the “significant amount of feedback” on the topic. “Treasury will announce its conclusion about issuance of FRNs at a later date, after our analysis has been completed.”

A Treasury official briefing reporters today declined to give a date for the decision. On a different matter, the Treasury official also said while there are good reasons to have negative yields at Treasury auctions, no decision has been made and there are operational challenges.

Next Week

Treasury said next week’s auctions will raise $35.3 billion of new cash. The department said it expects to keep note and bond auction sizes stable in the coming months.

“Going forward, Treasury will provide guidance to market participants regarding any changes in the fiscal outlook that might impact the government’s financing needs,” the statement said.

Floating-rate notes, which are already being offered by Fannie Mae, Freddie Mac and some European banks, have coupon payments linked to changes in short-term rates, which have been near zero since late 2008. The Treasury has sought to lock in borrowing costs for longer and cut the amount of outstanding short-term bills, which ballooned to $2.1 trillion during the financial crisis that began almost five years ago.

The notes would be the first new U.S. government debt security since Treasury Inflation-Protected Securities, known as TIPS, were introduced in 1997.

Global Demand

“The goal is to meet the global demand for liquid stable- value instruments without adding to the government’s rollover risk,” Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said before today’s Treasury statement.

“Floating-rate notes offer investors all the store-of- value advantages of a T-bill without increasing the Treasury’s rollover exposure. The proposal is a neat solution of the problem of reconciling these competing objectives,” Crandall said.

The securities may appeal to investors wary that four years of Federal Reserve monetary stimulus will spark inflation and cause the central bank to lift short-term rates even though policy makers have said they foresee keeping borrowing costs near zero at least through late 2014.

The Treasury Borrowing Advisory Committee, the bond dealers and investors who meet quarterly with the agency, unanimously endorsed them in February.

By offering floaters, the Treasury would show that it “doesn’t want to appear to be complacent about the explosion in its rollover requirement in recent years,” Crandall said.

Money has plowed into Treasuries at a record pace. Demand is increasing amid regulatory requirements that banks hold safer assets and investors flee Europe’s financial turmoil.

Investors bid $4.50 for every dollar of four-week Treasury bills offered at auction in the first quarter, compared with a bid-to-cover ratio of 2.7 during the first quarter of 2007.

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net; Meera Louis in Washington at mlouis1@bloomberg.net Cheyenne Hopkins in Washington at chopkins19@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Dave Liedtka at dliedtka@bloomberg.net;


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