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UPDATE 2-U.S. debuts floating-rate notes to robust demand
January 29, 2014 / 8:35 PM / in 4 years

UPDATE 2-U.S. debuts floating-rate notes to robust demand

By Richard Leong

NEW YORK, Jan 29 (Reuters) - 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 March.

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 percent.

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 August.

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 accordingly.

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 assets.

The Treasury scheduled the second offering of two-year floating-rate notes on Feb. 26.

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