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Tags: Treasury | Floating | Rate | Notes

Treasury Plans Floating-Rate Notes, Prepares Negative Rates

Wednesday, 01 August 2012 10:35 AM EDT

The U.S. Treasury Department said it is developing a floating-rate note program that could be operational in a year or more, while it is preparing for possible negative-rate bidding.

The U.S. Treasury Department also said it plans to sell $72 billion in notes and bonds in next week’s refunding. The Treasury intends to auction $32 billion in 3-year notes on Aug. 7, $24 billion in 10-year notes on Aug. 8 and $16 billion in 30-year bonds on Aug. 9.

“Treasury plans to develop a floating rate note program to complement the existing suite of securities issued and to support our broader debt management objectives,” the department said in a statement. “The first FRN auction is estimated to be at least one year away.”

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.

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

Bond Dealers

The Treasury Borrowing Advisory Committee, the bond dealers and investors who meet quarterly with department officials, said it unanimously supports the introduction of such notes as soon as possible.

The advisory group recommended using general collateral instead of Treasury bills for the floating-rate notes. The group, known as TBAC, said there would be “strong, broad-based demand for the product.”

The yield on benchmark 10-year Treasury note rose to 1.5 percent at 9:18 a.m. New York time from 1.47 percent late yesterday.

The Treasury also said it is “in the process of building the operational capabilities to allow for negative-rate bidding in Treasury bill auctions, should we make the determination to allow such bidding in the future.”

The Treasury said that the U.S. debt limit is expected to be reached at the end of this year, and it expects to use “extraordinary measures” to fund the government into early 2013.

Obama Administration

The Obama administration said July 27 it is forecasting the federal budget deficit will be $1.21 trillion this year, down from $1.33 trillion projected in February. The U.S. faces a so-called fiscal cliff of higher taxes and reductions in spending on defense and other government programs that will take effect at year-end unless Congress acts.

“I think it’s pretty clear that the Treasury has to tread lightly,” William O’Donnell, head U.S. government bond strategist at the Stamford, Connecticut-based RBS Securities primary dealer unit of Royal Bank of Scotland Group Plc., said by e-mail before the report. “There is a lot of uncertainty in the near-future path(s) of outlays and receipts and the fog may not lift until the fiscal issues are addressed.”

© Copyright 2024 Bloomberg News. All rights reserved.

Wednesday, 01 August 2012 10:35 AM
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