By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — The Treasury Department announced Wednesday that it plans to sell floating-rate notes, with the first auction estimated to be at least one year away.
A floating rate note pays a variable interest rate. The adjustments are made periodically. Treasury had discussed the idea of floating-rate notes for the past year, but the final decision to issue the new notes was a surprise to many analysts.
The Treasury Borrowing Advisory Committee, a panel of securities industry experts who advise the government on debt issues, predicted there would be “strong, broad-based demand” for floating-rate notes.
Treasury has an incentive to issue the new securities because it is facing a spike in debt issuance as a result of the Federal Reserve’s Operation Twist program. The Fed is now selling short-term Treasurys that it used to reinvest in Treasury auctions.
Treasury projects that it must now sell an estimated $667 billion of additional debt to the public over the next four years. The floating-rate notes will help give the government flexibility in its increased debt offerings.
In a statement, Matthew Rutherford, Treasury acting assistant secretary for financial markets, said the program’s details were still under review.
But officials confirmed that the notes will not be indexed to the Libor overnight lending rate that has come under scrutiny in the wake of a scandal that it was manipulated during the financial crisis.
The Borrowing Advisory panel said it was interested in referencing the securities to the DTCC GCF Repo index, especially given the recent launch of the NYSE Liffe’s listed futures on the index. The GCF Repo market is a $300 billion one, the NYSE says.
Treasury also announced it will sell $72 billion in notes and bonds next week in its quarterly refunding auctions. The department will auction $32 billion in 3-year notes 3_YEAR +1.72% on Aug. 7, $24 billion in 10-year notes 10_YEAR +2.65% on Aug. 8 and $16 billion in 30-year bonds 30_YEAR +1.77% on Aug. 9.
Treasury has maintained these same auction sizes for eleven straight quarters starting in November 2010. The auctions will refund $54.2 billion in maturing securities and will raise approximately $17.8 billion.
Treasury said it expects to keep note and bond auction sizes stable in coming months.
Rutherford repeated earlier guidance that Treasury expects to hit the debt limit “near the end of 2012” and can use extraordinary measures to allow the government to pay its bills “until early in 2013.”
Rutherford promised to provide guidance to markets regarding any change in fiscal policy that might impact the debt markets.
He also said that the agency is going to build systems that allow for negative rate bidding in Treasury short-term bill auctions. But he stressed that no final decision had been made to allow such bidding.
Greg Robb is a senior reporter for MarketWatch in Washington.
