Treasury’s Floating-Note Debut Shunned in Asia: Credit Markets
All 10 investors surveyed by Bloomberg News this week before the offering said they wouldn’t be bidding on the $15 billion of two-year debt, with short-term U.S. yields held down by a Federal Reserve that’s in no hurry to raise its benchmark interest rate from a record low. Daiwa SB Investments Ltd. and Hontai Life Insurance Co. said they want longer-term securities with higher yields. Mitsubishi UFJ Asset Management Co. said it won’t buy because there are no floating-rate bonds in the index it uses to gauge performance.
The auction drew a bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, of 5.67. The securities were sold with a high discount margin of 0.045 percent, the Treasury Department said.
“There’s not much opportunity to get extra return” by purchasing the new notes, said Kei Katayama, a money manager in Tokyo at Daiwa SB, which oversees the equivalent of $48 billion. “The market is currently expecting the first phase of rate hikes after 2015 or 2016. I’m not so interested.”
The floating-rate notes are the Treasury’s first new security in 17 years, and come as legislation on the nation’s borrowing limit causes the Treasury to scale back on bill sales. The reluctance among Asian investors to buy the debt shows faith in the Fed when it says the tapering of bond purchases this year doesn’t mean a tightening of monetary policy. U.S. policy makers conclude a two-day meeting today.
The Treasury expected to attract demand for the notes being sold today after discussing floating-rate products with market participants for almost three years, Treasury Assistant Secretary for Financial Markets Matthew Rutherford said on Bloomberg Television on Jan. 23.
Assets in money-market mutual funds have risen 5.6 percent to $2.707 trillion from last year’s low of $2.563 trillion in May, according to research firm iMoneyNet in Westborough, Massachusetts. The amount peaked at $3.922 trillion during the height of the financial crisis in January 2009.
Money-market funds probably won’t allocate more than 10 percent of their assets to the floating-rate notes because they have a longer maturity than the average that the funds target, Fitch Ratings said yesterday in a statement.
Demand for the safest short-term investments has increased in recent years as investors and institutions respond to more stringent liquidity and capital standards imposed by regulators aiming to reduce the risk of another financial crisis. Rates on three-month Treasury bills have averaged 0.07 the past four years, sometimes falling below zero.
The initial floating-rate note issue was “expected to be welcomed by short-term investors as market and regulatory developments are reducing the supply of other short-term instruments,” Fitch said. “The expected incremental spread to T-bills will likely generate significant demand for the FRNs among money market funds and other conservative short-term investors, providing for good liquidity of the instrument.”
After increasing bill issuance to fund emergency programs during the financial crisis, the Treasury has cut back as it pushed to sell longer-term debt and lock in record low rates. Treasury bills, securities due in a year or less, are down to $1.59 trillion outstanding from a peak of $2.1 trillion in 2009.
The new floating-rate notes are considered short-term debt because their interest payments will rise and fall based on auction rates for 13-week Treasury bills, which have dropped to 0.055 percent from last year’s high of 0.13 percent. The U.S. plans to auction them monthly, with four new offerings a year and two reopenings each.
Short-term yields (USGG2YR) are too low for Hontai Life Insurance Co. in Taipei, which oversees $6 billion.
“We don’t trade anything shorter than five-year Treasuries,” to earn higher yields, said Allen Lei, a money manager at Hontai. “We don’t have any interest” in the floaters. U.S. five-year notes yield 1.52 percent.
Sumitomo Mitsui Trust Asset Management Co. money manager Hideaki Kuriki in Tokyo said he prefers the 3.70 percent yields of 30-year bonds, which is above the 0.38 percent of two-year notes. The firm manages $40.9 billion.
AMP Capital Investors Ltd. in Sydney has “limited” interest in floating-rate notes, said Mark Beardow, a bond fund manager who helps oversee $118.2 billion for the firm.
“Lots of our customers have big equity portfolios and they’re looking for fixed-income portfolios to provide them protection in the event of economic or market shocks,” Beardow said. “We principally use sovereigns for defense and liquidity,” rather than betting on rising rates, he said.
Asian investors are among the biggest holders of U.S. debt. China, America’s largest overseas creditor, held $1.32 trillion of the debt in November, based on the latest Treasury data, while Japan owned $1.19 trillion.
The Fed has kept its benchmark rate in a range of zero to 0.25 percent for five years. The odds of an increase to 0.5 percent by January 2015 are about 20 percent, based on futures contracts.
The central bank’s pledges to keep the overnight rate low have helped maintain demand for Treasuries even as the Fed begins to taper its bond purchases from $85 billion a month. It already cut the pace to $75 billion and will probably it to $65 billion at its meeting today, according to a Bloomberg News survey of economists.
When policy makers said in December they would start paring purchases, they also said the target for overnight loans between banks would probably be kept near zero “well past the time” that the unemployment rate declines below 6.5 percent, especially if the projected inflation rate is less than the central bank’s 2 percent target.
The U.S. unemployment rate was 6.7 percent in December, and the Fed’s preferred measure of inflation was 0.9 percent in November, based on the latest government figures. The gauge probably reached 1.1 percent in December, according to economists surveyed by Bloomberg before data due Jan. 31.
Yields on two-year fixed-rate notes, which tend to track the Fed’s target rate, have fallen from last year’s high of 0.53 percent. The average over the past 12 months is 0.31 percent. The yield will climb to 0.85 percent by year-end, based on the average of economists and strategists surveyed by Bloomberg, with the latest forecasts given the greatest weightings. The notes yielded 0.36 percent at 11:54 a.m. in New York.
The index Mitsubishi UFJ uses to guide its investment choices doesn’t contain floaters, ruling out any purchases, said Hideo Shimomura, the chief fund investor who helps oversee the equivalent of $68.2 billion for the company in Tokyo.
Mizuho Asset Management Co., overseeing $39 billion from Tokyo, won’t buy because the securities aren’t included in its fund investment guidelines, said Yusuke Ito, an investor at the firm. Mirae Asset Global Investment doesn’t offer floating-rate products, said Will Tseng, a fund manager in Taipei for the South Korean company, which oversees $58 billion.
Bond investors in Tokyo at Fukoku Mutual Life Insurance Co., with $59 billion in assets, and Diam Co., overseeing $115 billion, said they won’t buy because they aren’t familiar with the product.
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