--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

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