UPDATE: Treasury Makes No Decision On Floating-Rate Notes
03 May 2012 - 12:16AM
Dow Jones News
The U.S. Treasury said Wednesday it has not yet decided whether
to start issuing floating-rate notes as it weighs comments from
bankers and traders on the best way to structure the 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 is in the process of analyzing the feedback, and we
continue to study the benefits and optimal terms of a Treasury
[floating rate note]," Acting Assistant Secretary for Financial
Markets Matthew Rutherford said in a statement.
The Treasury Borrowing Advisory Committee unanimously
recommended that Treasury pursue the plan--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.
Treasury said it would conduct further analysis and announce a
conclusion at a later date. It didn't specify a time frame, though
the minutes showed that floating-rate notes could not be issued
before 2013 because of limitations in the Treasury Department's
system for issuing debt.
A Treasury official said that on balance feedback had been
positive, and the department would try to make a decision as soon
as practicable.
Treasury advisers said floating-rate notes would expand the
Treasury's investor base and help extend the maturity of Treasury
debt.
Rutherford's statement made no comment on potential issuance of
negative-yield debt, which would effectively see investors pay to
let the government borrow their money.
The Treasury official, who spoke on condition he not be named,
said there remain good reasons to issue such debt. The minutes
cited "several operational challenges" to a negative-yield
product.
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, though
the official said they have not been persistently negative since
the start of the year.
The discrepancy means the Treasury Department is effectively
losing out every time it sells securities with higher yields than
the prevailing level in the market.
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
--Matt Phillips contributed to this article.