--Treasury sees first floating-rate note auction at least a year
away
--Floating-rate note would be first new Treasury product in 15
years
--Treasury also weighing negative-rate bids
(Recasts and updates throughout.)
By Jeffrey Sparshott
WASHINGTON--The U.S. Treasury Department said Wednesday it will
start selling floating-rate notes, the first addition to the
Treasury's arsenal of products in 15 years.
The first auction of the new product is at least a year away,
reflecting the time Treasury needs to prepare for the new product,
said Acting Assistant Secretary for Financial Markets Matthew
Rutherford.
The new note will "complement the existing suite of securities
issued and...support our broader debt management objectives,"
Rutherford said.
Treasury also plans to change its IT systems to allow
negative-rate bidding, though it hasn't made a final decision to
proceed with issuance of such debt, Rutherford said.
Negative-rates would effectively have investors paying to let
the government borrow their money.
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.
A Treasury official said the department hasn't seen negative
rates so far this year.
Floating-rate notes would expand the Treasury's investor base
and help extend the maturity of government debt.
The Treasury Borrowing Advisory Committee, a private-sector
panel that advises Treasury, had earlier this year recommended that
Treasury introduce the product but was divided on the best way to
set the variable interest rate.
The committee now appears to have formed a consensus around
referencing Treasury general collateral. "The introduction of GCF
futures aided the argument," minutes of the committee's meeting,
released Wednesday, said.
The GCF Repo index is published by the Depository Trust &
Clearing Corp. It tracks the actual cost of swapping high-quality
bonds for cash in bank trades known as repurchase or "repo"
agreements--a crucial source of short-term funding for many
banks.
Unlike fixed-rate securities, floating-rate debt pays interest
that is periodically reset either up or down, depending on how
interest rates have moved. To do that, the floating-rate Treasurys
would need to have some sort of benchmark, or index, rate to be
measured against.
The 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., a unit of Allianz
SE (ALV.XE). The group met Tuesday and minutes were released
Wednesday.
Treasury made the announcement as it said it would issue $72
billion in securities next week as it looks to fund the
government's mounting debt.
The Treasury has been borrowing heavily to make up the
difference between spending and revenue--the budget deficit for
October through June, the first nine months of the fiscal year,
totaled $904.24 billion.
That puts the federal government on a pace to hit its $16.39
trillion borrowing limit toward the end of the year, Treasury said
Wednesday.
But Treasury can employ so-called extraordinary
measures--suspending some investments and swapping funds among
accounts--that allow Congress more time to raise the limit. "We
expect that these extraordinary measures would provide sufficient
'headroom' under the debt limit to allow the government to continue
to meet its obligations until early in 2013," Rutherford said.
The Treasury sells bills, notes, and bonds to finance government
operations and pay off debt. Every quarter, it holds a refunding, a
replacement of government debt, often debt that is about to mature,
with new debt.
--Matt Phillips contributed to this article.
Write to Jeffrey Sparshott at jeffrey.sparshott@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires