By Richard Leong
NEW YORK Jan 29 The U.S. government, seeking a
new vehicle to raise cash, sold its first floating-rate debt on
Wednesday to strong demand underpinned by concerns that reduced
Federal Reserve stimulus would lift interest rates.
Investors and Wall Street dealers bid more than five times
the $15 billion of this variable-rate Treasury issue offered.
"The first auction looks to have been a success," Jefferies
& Co. money market strategist Thomas Simons wrote in a note.
Investors worried about rising interest rates due to an
improving global economy and decreasing policy accommodation
from the Federal Reserve have been drawn to bonds whose interest
rates reset higher if benchmark borrowing costs rise.
The Fed as expected on Wednesday pared its monthly
bond-purchase stimulus by $10 billion to $65 billion from
February after a similar reduction in January.
Money market funds were seen as keen buyers of the first new
type of government security since the introduction of Treasury
Inflation-Protected Securities in 1997 because of its interest
rate protection feature.
Analysts said this floating-rate debt is slightly riskier
than Treasury bills but less risky than bills issued by mortgage
agencies Fannie Mae and Freddie Mac.
They added money funds are looking for other investments as
Treasury bill supply has shrunk in recent weeks to make room for
the two-year floating-rate notes and in anticipation of the
government hitting its $16.7 trillion debt ceiling by early
Money fund investors' interest in this new Treasuries
security is, however, tempered with a dose of skepticism.
"It's a shiny new toy, but there might not be the same level
of buyers in the third and fourth issues," said Tom Nelson,
chief investment officer at Reich & Tang, a New York-based money
market management firm.
Still, the first auction of two-year floating-rate notes
exceeded already upbeat expectations.
The Treasury Department auctioned $15 billion of
floating-rate notes that mature in January 2016 at a yield
premium of 0.045 percent above an index of interest rates on
three-month Treasury bills, which stood at 0.055
These two-year floaters were yielding below two-year
fixed-rate notes, meaning lower interest payments for
the government than what it pays on its fixed-rate debt.
On Tuesday, the Treasury sold $32 billon in two-year
fixed-rate debt at a yield of 0.38 percent, the highest since
The three-month T-bill index is recalculated weekly after
the three-month bill auction, while the interest payment on the
floating-date note is paid every three months and adjusted
The bid-to-cover ratio at the floating-rate note auction, or
the amount of bids to the amount offered, came in at 5.67, which
Nomura analysts said in a note was "very high by any standard
for a Treasury auction."
"We'll see does that enthusiasm hold up," said Dave
Sylvester, head of money markets at Wells Capital Management in
Minneapolis, who oversees about $131 billion in money market
The Treasury scheduled the second offering of two-year
floating-rate notes on Feb. 26.