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Treasury Makes No Decision On Floating-Rate Notes

05/02/2012 | 11:52am US/Eastern

-- Treasury weighing market comments on floating-rate notes

-- Treasury advisers split on best way to index floating-rate notes

-- No decision on negative-yield debt

(Recasts, adds Treasury and analyst comments, background in paragraphs three to five, nine to 13.)

 
   By Jeffrey Sparshott and Maya Jackson Randall 
   Of  
 

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. (>> Goldman Sachs Group, Inc.), J.P. Morgan Chase & Co. (>> JPMorgan Chase & Co.), 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.

Stocks mentioned in the article : Goldman Sachs Group, Inc., JPMorgan Chase & Co.
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