The U.S. Treasury Department sees a strong market for floating-rate notes that would give it a new tool for managing the government's borrowing needs, but is putting off a decision for now on selling them, a senior official said on Wednesday.
Financial markets were watching for the Treasury to announce at a scheduled quarterly refunding press conference that it would begin issuing floating-rate debt. But it said it was still analyzing feedback and wouldn't say when it will decide.
Floating-rate notes would attract investors who want to be sure they don't miss out if general interest rates start to move up. They would be a wholly new product to pitch for the Treasury, which does not currently offer this type of debt security.
Most feedback has been positive, said Matthew Rutherford, acting assistant Treasury secretary for financial markets, but Treasury was moving gradually and deliberately.
"Treasury will announce its conclusion about issuance ... at a later date, after our analysis had been completed," the Treasury said in a statement.
At a press conference, Rutherford was asked to explain why the Treasury was mulling floating-rate debt at this time. Some analysts have noted that with interest rates near rock-bottom, the most likely general direction is upward, meaning that borrowing costs for the government would rise.
"We have been talking about looking at new products for about a year, well, for about 15 months now," he said. "The consistent feedback that we've gotten from the marketplace is that floating-rate notes could potentially be something that would be additive to Treasury's mix of offerings."
He added: "There's quite a bit of demand for high-quality, low-duration instruments in the system. So I think that most people think that this is going to be something that, if we decided to pursue it, would be very well received."
A Treasury official noted that as government-sponsored enterprises Fannie Mae and Freddie Mac — both of which were taken over by the government during the 2007-2009 financial crisis and are expected to be wound down — issue less floating debt, there may be more room in markets to sell it.
The Treasury comments on floating-rate debt came as it announced a $72 billion quarterly refunding of three-year, 10-year, and 30-year debt securities to take place next week. Those sales will raise about $35.3 billion of new cash for the government.
A committee of top Wall Street firms advises Treasury ahead of the quarterly refunding sales on market conditions. It recommended that if Treasury proceeds with floating-rate notes — which would be the first new type of debt offering in 15 years — it should keep them to two years' maturity or less.
One unresolved issue is what reference index to use as a tie for a floating rate. Treasury advisors were divided over whether to use the short-term Treasury bills rate, the federal funds effective rate or a Treasury general collateral rate.
Market reaction to Treasury's refunding announcement, which was well within expectations, was muted and there was little surprise that it was moving cautiously on floating-rate notes.
"I don't think they want to rush into anything," said Chris Ahrens, interest-rate strategist at UBS in Stamford, Conn. "I don't think it (the floating-rate notes) would make a significant dent on their financing needs."
Still Considering Negative Rate Auctions
In response to questions, Rutherford said the government also was still considering negative yield auctions, but hasn't decided whether to initiate them or not.
At its last refunding announcement in February, the Treasury said it was looking at the possibility of holding such auctions in the face of robust demand for U.S. government-backed debt, a move that would effectively make investors pay for the privilege of holding U.S. debt securities.
Near the turn of the year, some Treasury bills trading in the secondary market were paying negative yields and some four-week bill auctions produced a high rate of zero percent.
Rutherford noted there were problems with maintaining an "artificial floor at zero," one of them being that the government — and therefore taxpayers — would be paying more than it needed to if investors were willing to accept negative yields as the price to pay for the safety of Treasurys in times of financial stress.
The Treasury said it expected to keep its note and bond auction sizes stable in coming months and said it was still assessing how much money flowed into its coffers during this year's tax season. April 17 was the deadline for individuals to pay their taxes from 2011.
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