BLBG: U.S. Treasury Plans Floating-Rate Notes In Year Or More
By Meera Louis and Cheyenne Hopkins
The U.S. Treasury Department said today 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 today in Washington. “The first FRN auction is estimated to be at least one year away.”
The notes would be the first new U.S. government debt security since Treasury Inflation-Protected Securities, known as TIPS, were introduced in 1997. With a budget deficit estimated at $1.21 trillion this year, the Treasury needs to expand its base of investors, and the notes may appeal to those who are seeking to protect themselves from a possible increase in interest rates or faster inflation stemming from the Federal Reserve’s unprecedented stimulus.
The Treasury Borrowing Advisory Committee, the bond dealers and investors who meet quarterly with department officials, said it unanimously supports the introduction of the notes as soon as possible. The group predicted “strong, broad-based demand for the product.”
Liquidity Requirements
Capital and liquidity requirements from the 2010 overhaul of financial regulation in the Dodd-Frank Act, and from the Basel III global rules, have increased demand for short-term, high-quality debt at a time when supply has diminished.
Still, floating-rate notes pose risks for the Treasury, according to Campbell Harvey, a finance professor at Duke University’s Fuqua School of Business in Durham, North Carolina. If interest rates rise from historic lows, the Treasury will need to pay investors more to borrow, he said in an April interview.
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.”
Debt Limit
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.
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.”
To contact the reporter on this story: Meera Louis in Washington at mlouis1@bloomberg.net;
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net;
