The U.S. Treasury Department will sell $10 billion to $15 billion of its first floating-rate notes Jan. 29 and said a period of political wrangling over the budget requires a delay in plans to reduce coupon auctions.
The floating-rate notes will have a two-year maturity and be the Treasury’s first new security in 17 years, the department said today in its quarterly refunding announcement. Note and bond sales next week will total $70 billion, the lowest since February 2009 and less than the $72 billion auctioned last quarter, the Treasury said.
Disagreements between Republicans and Democrats over the nation’s fiscal direction are complicating the Treasury’s debt management this quarter and next. The inaugural sale of so-called floaters should go ahead even with a debt-limit debate looming early next year, according to minutes of the Treasury’s borrowing advisory committee.
“Treasury is going back on hold and waiting to see what will happen at the upcoming budget negotiations,” said Gennadiy Goldberg, a strategist at TD Securities USA LLC in New York. “The road is not really clear for them to cut the auction sizes further, but it hasn’t prevented them from adding this new product, floating rate notes.”
The Treasury also said it will sell $30 billion in three-year notes Nov. 12, $24 billion in 10-year debt on Nov. 13, and $16 billion in 30-year bonds on Nov. 14, according to today’s statement.
The yield on 10-year Treasuries fell to 2.63 percent at 11:41 a.m. today in New York from 2.67 percent late yesterday.
The U.S. sells bills, notes and bonds to finance operations after 12 straight years of budget deficits, according to Treasury data compiled by Bloomberg. The shortfall in the year ended Sept. 30 was $680.3 billion, the smallest in five years, compared with a $1.09 trillion gap in fiscal 2012.
Floaters are securities with rates set periodically, and the Treasury’s notes will be referenced to the 13-week bill rate. They are the first new U.S. government debt securities since Treasury Inflation-Protected Securities were introduced in 1997.
For investors, floaters offer short-term security that’s a hedge against a potential rise in interest rates. For the Treasury, the goal is to provide additional debt that appeals to investors while keeping financing costs low.
“Floaters are another strong diversifier for investors, providing opportunity to investors to manage their exposure to Treasury debt,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York. “And the Treasury will reap the benefit if interest rates stay lower, longer than anticipated. It’s a good thing for investors and the government.”
Matthew Rutherford, the Treasury’s assistant secretary for financial markets, told reporters that the floaters would be auctioned monthly, with four new offerings a year and two reopenings each. Asked about possible debt-limit disruptions, he said officials in his office are used to dealing with uncertainty in the outlook.
A House-Senate conference committee, created in an Oct. 16 measure that ended a partial government shutdown last month and suspended the nation’s debt limit through Feb. 7, faces a Dec. 13 deadline to reach a budget agreement to avoid a second round of automatic spending cuts in January.
In the statement, the Treasury urged Congress to raise the debt ceiling “well before” Feb. 7 “to provide certainty and stability to the economy and financial markets.”
In the borrowing advisory committee’s letter to Treasury Secretary Jacob J. Lew after its meeting yesterday, the panel recommended that issuance remain at current levels and not “continue with the gradual decline of two- and three-year maturity issuance sizes as was recommended at” a meeting in July.
The Treasury agreed, saying in the statement today it “intends to maintain coupon issuance sizes at current levels over the coming quarter” and “will continue to monitor projected financing needs and will make adjustments to auction sizes as necessary.”
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