U.S. Sees Floating-Rate Note by 1Q 2014, Lower Coupon Sizes

The U.S. Treasury Department said it plans to sell a floating-rate security as early as the fourth quarter this year and signaled it may decide to “gradually” reduce the supply of notes and bonds at auction.

In its quarterly refunding statement today, the Treasury said a final rule on the floating-rate note auction is planned for coming months, with a first sale estimated to occur either in the fourth quarter this year or the first quarter of 2014. The department said it will use the weekly high rate of 13-week Treasury bill auctions as the index for the notes.

With a budget deficit of more than $1 trillion last year, the Treasury needs to expand its base of investors. So-called 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.

“The floaters are being tailored to its audience and also to make it easier to transition into the product,” George Goncalves, head of interest-rate strategy in New York at primary dealer Nomura Holdings Inc., said in a telephone interview.

The yield on 10-year Treasury notes stayed lower after the announcement, paying 1.64 percent at 10:04 a.m. in New York compared with 1.67 percent late yesterday. It fell earlier after a report from from ADP Research Institute showed companies added fewer workers than economists forecast in April.

New Offering

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.

“Indexing to the bill rate is likely a function of a preference at the Treasury and because global investors, like central banks, are more familiar buying Treasury bills and are likely more comfortable with this approach to the floaters,” Goncalves said.

The Treasury also said will auction $72 billion of coupon securities next week, comprised of $32 billion in three-year notes on May 7; $24 billion in 10-year notes on May 8; and $16 billion in 30-year bonds on May 9. The Treasury has kept its quarterly refunding auctions unchanged at $72 billion since November 2010.

“Depending on how the fiscal situation develops, Treasury may decide to gradually decrease coupon auction sizes,” the department said in the statement.

Dealers’ Discussion

The Treasury Borrowing Advisory Committee, the bond dealers and investors who meet quarterly with department officials ahead of the refunding, said in minutes of a meeting yesterday that it might be more prudent for the government to wait before deciding on adjusting financing.

The minutes said that James Clark, deputy assistant secretary for federal finance, told the panel that the Treasury was tentatively considering $10 billion to $15 billion in floaters a month and would solicit more market opinions as the first auction approached.

Any reduction in the amount of coupon debt issued by the Treasury this year would cut the supply of bonds available for the Fed to purchase in their latest round of quantitative easing.

The central bank is buying $85 billion of Treasury and mortgage debt a month to spur economic growth and has said it will continue to do so until it sees a “substantial” improvement in the labor market. It has also pledged to keep its target rate for overnight loans between banks near zero as long as unemployment is above 6.5 percent and inflation isn’t forecast to exceed 2.5 percent.

Debt Ceiling

Complicating the Treasury’s financing plans is a political fight over fiscal responsibility. President Barack Obama on Feb. 4 signed legislation temporarily suspending the $16.4 trillion debt limit through May 18.

In today’s statement, Treasury said it can use “extraordinary measures” to meet its obligations and to stay under the ceiling “for a period of time after May 19.”

“If Congress fails to increase the debt limit by May 19, Treasury can use extraordinary measures to create additional borrowing room,” the department said in today. “We will provide greater clarity at a later date regarding how long extraordinary measures will allow Treasury to continue to borrow.”

The House Ways and Means Committee April 24 passed a measure intended to ensure that U.S. government bondholders continue to be paid and that Social Security benefits aren’t interrupted even if a stand-off over raising the borrowing cap causes a cash crunch.

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