Treasury Floater Demand Outstrips Fixed-Rate Average Fourth Time

Demand at the Treasury’s sale of $15 billion of two-year floating-rate notes outstripped that at auctions of conventional fixed-coupon debt for the fourth straight time as investors searched for better options to money-market securities.

The floaters, which the Treasury introduced in January as the first new debt offering in 17 years, drew bids yesterday for 4.64 times the amount sold. That compared with a bid-to-cover ratio of 2.95 for the $701 billion in fixed-rate notes and bonds sold this year. The high-discount margin was 0.069 percent, matching that at the sale on March 26. The inaugural floating-rate auction was on Jan. 29.

“Floaters continue to have decent healthy demand even though the valuations aren’t cheap,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of the 22 primary dealers that are obligated to bid in U.S. debt sales. “There is a limited history to compare them with, but so far the path has been good for these securities.”

The Treasury is seeking to lengthen the average maturity of its debt and cut the amount of outstanding short-term bills, which ballooned to $2.1 trillion during the the global financial crisis. The new notes also offer protection against rising interest rates, with investors anticipating that the Federal Reserve is preparing to raise its benchmark rate next year from virtually zero in what would be the first increase since 2006.

Bill Alternative

The floating-rate notes, the first new U.S. government debt securities since Treasury Inflation Protected Securities were introduced in 1997, are considered an alternative to bills because they’re benchmarked to a short-term security.

At yesterday’s auction, indirect bidders, a class of investor that includes foreign central banks, bought 34.4 percent of the notes, compared with 32.7 percent at the March sale and an average of 36.7 percent at the first three auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 4.8 percent, compared with 4.3 percent in March and an average of 6.3 percent at the first three sales.

Primary dealers bought 60.7 percent of the securities, compared with 63 percent in March, which was a record. Dealer shares averaged 57 percent at the past three sales of the debt.

The average bid-to-cover ratio at the past three offerings was 5.21.

“The auction was fair, but there is still a wait-and-see attitude among investors,” said Thomas Simons, a government-debt economist in New York at the primary dealer Jefferies Group LLC. “The path has been positive, as demand is steadily, but slowly, developing in the market, which remains relatively illiquid and nonvolatile. Investors who are buying them are putting them away.”

The securities sold yesterday are due in April 2016. The Treasury plans to sell reopenings in May and June. It will offer new issues in July and October, with two reopenings in the subsequent months of each quarter.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey, Paul Cox

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