2nd UPDATE: Treasury Makes No Decision On Floating-Rate Notes
May 02 2012 - 11:07AM
Dow Jones News
The U.S. Treasury said Wednesday it is still considering whether
to start issuing floating-rate notes, though it will take its time
weighing investor comments and studying the potential impact of a
new product.
Floating-rate notes would be the first addition to the
Treasury's arsenal of products in 15 years, and could help the
government finance its mounting debt. The department asked market
participants for views on the notes in March.
"Treasury believes there are benefits to issuing floating-rate
notes," acting Assistant Secretary for Financial Markets Matthew
Rutherford said at a press conference. "One key thing to keep in
mind here is that Treasury doesn't often introduce new
securities...so we want to make sure we take great care and have a
thorough analysis of the benefits."
Treasury in January said it expected a decision on the notes in
early May, but Wednesday declined to pinpoint a specific time frame
for an announcement. Even if it gives the go-ahead soon, technical
issues make it impossible to start issuing them before next year,
Rutherford said.
Floating-rate notes would expand the Treasury's investor base
and help extend the maturity of government debt.
The Treasury Borrowing Advisory Committee unanimously
recommended that Treasury introduce the product--with most members
favoring a maturity of two years or less--but was divided on the
best way to set the variable interest rate.
"There was a lack of consensus on the reference index, with
respondents divided between Treasury bills, the federal funds
effective rate, and a Treasury general collateral rate," minutes of
the advisory committee meeting said. Four members favored T-bills,
three general collateral and six federal funds effective.
The 13-member advisory panel includes executives from some of
Wall Street's largest banks and bond investors, such as Goldman
Sachs Group Inc. (GS), J.P. Morgan Chase & Co. (JPM), Morgan
Stanley (MS) and the Pacific Investment Management Co. unit of
Allianz SE (AZSEY, ALIZF, ALV.XE). The group met Tuesday and
minutes were released Wednesday.
"Yes of course [eventually] they will sell floaters. They want
to have a more diverse array of instruments. They have not made a
decision on the appropriate index," said Ward McCarthy, chief
financial economist within the fixed income group at Treasury bond
primary dealer bank Jefferies & Co. "They also are as much in
the dark about FY13 borrowing needs as everyone else, and will not
want to roll out a new program until they know what their borrowing
needs are."
Treasury is also weighing issuance of negative-yield debt, which
would effectively have investors paying to let the government
borrow their money.
Rutherford said there remain good reasons to issue such
securities, though again there has been no decision.
The Treasury's current auction system doesn't allow debt with a
negative yield to be sold in the primary market. In the secondary
market, where investors trade Treasury securities among themselves,
yields on short-term debt have in the past been negative. A
discrepancy would mean the Treasury Department is losing out every
time it sells securities with higher yields than the prevailing
level in the market.
Rutherford said "an artificial floor at zero could potentially
lead to some disruption in auctions." Also, taxpayers could lose
out if Treasury were unable to issue securities at negative rates,
he said.
The Treasury Borrowing Advisory Committee had agreed at a Jan.
31 meeting that the policy of not allowing negative yields at
auction "was prohibiting proper market function."
-By Jeffrey Sparshott, Dow Jones Newswires; 202-862-9291;
jeffrey.sparshott@dowjones.com
--Min Zeng and Matt Phillips contributed to this article.