U.S. Treasury Sees Floating-Rate Note Sale Within Next Year
The U.S. Treasury Department said it plans a floating-rate note auction within the next year and urged Congress to reach a long-term debt-limit solution.
The Treasury will auction $72 billion of coupon securities next week, comprised of $32 billion in three-year notes on Feb. 12; $24 billion in 10-year notes on Feb. 13; and $16 billion in 30-year bonds on Feb. 14. The Treasury has kept its quarterly refunding auctions unchanged at $72 billion since November 2010.
“We plan to issue a final rule on floating-rate notes in the coming months, with the first FRN auction still expected to occur within the next year,” the Treasury said in a statement in Washington. “Failure by Congress to pass a timely increase in the debt limit when the temporary suspension expires would require Treasury take certain extraordinary measures in order to provide Congress more time to act and to protect the creditworthiness of the country.”
President Barack Obama on Feb. 4 signed legislation temporarily suspending the $16.4 trillion debt limit through May 18.
After that date, “extraordinary measures will be available to” Treasury, “which will allow us to continue to finance ourselves for a period of time that’s longer than that,” Matthew Rutherford, Treasury’s assistant secretary for financial markets, said in a press conference. “I don’t think I’m prepared to give you an estimate on how long that would last.”
The statement also said the Treasury expects to gradually increase the issuance of Treasury Inflation-Protected Securities in 2013.
The Treasury Borrowing Advisory Committee, the bond dealers and investors who meet quarterly with department officials, discussed potential changes in coupon auction sizes yesterday.
“It was the consensus view of the committee that coupon sizes should remain unchanged and that any residual funding needs could be met with adjustments to bill issuance,” according to minutes of the meeting released by the Treasury.
The floating-rate notes would be the first added U.S. government debt security since the Treasury Inflation-Protected Securities, known as TIPS, were introduced in 1997. With a budget deficit of more than $1 trillion last year, the Treasury needs to expand its base of investors, and floaters 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 monetary stimulus.
Floating-rate notes linked to a Treasury bill rate “isn’t really offering anything too new or different to investors,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “I don’t really think the convenience of not having to roll over the debt is a big deal. So to the extent the Treasury is coalescing around using some sort of bill rate as an index choice, I suspect that is probably being met with some disappointment among the investor community.”
Treasury hasn’t chosen the index to use for pricing floating-rate notes. Possibilities include the Treasury 13-week bill auction high rate or a Treasury general collateral overnight repurchase agreement rate.
“I’m not prepared to say we are leaning one way or the other,” Rutherford said. “I think there are benefits to each index, but ultimately our job is to finance the government at the lowest cost over time.”
The group also discussed “hypothetical” debt issuance strategies, including a 50-year bond and a 20-year bond.
“They explored different scenarios under which we could more aggressively extend the average maturity of the debt and it was in that context a 50-year bond was mentioned,” Rutherford said. “However, I don’t think there was any consensus on that and I think the committee definitely recommended that further study would be required before anything like that would be implemented.”
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