By Emily Flitter and Glenn Somerville
NEW YORK/WASHINGTON, March 19 The U.S. Treasury
Department on Monday asked for public views on whether to sell
floating-rate notes that would offer a new way for investors to
protect themselves from interest rate risk while keeping their
money in safe-haven U.S. debt.
Issuing "floaters," as they are called, would amount to the
Treasury's largest new product launch since it began selling
inflation-linked notes and bonds more than 10 years ago.
"There's definitely a market for it," said Joe Larizza, a
Treasuries and agencies trader at Raymond James in Memphis.
"Most of the market would be money market funds,
municipalities, short-term cash positions for hedge funds and
other bond funds."
Floaters would not offer investors a fixed coupon but base
coupon payments on a dynamic interest rate such as the
benchmark, 3-month London Interbank Offered Rate, which changes
daily based on big banks' reports of their borrowing costs.
This would be important, traders said, for investors who
would normally buy a risk-free Treasury bond at a yield that was
acceptable in a low interest-rate environment and then try to
protect against being stuck with the low-yielding bond as rates
rise in the marketplace.
The rate on the floater would rise alongside increasing
rates in the marketplace, keeping pace with inflation and
essentially maintaining the original value of the investment.
Larizza cautioned the floater would never be a hot,
high-yielding vehicle. It would just not contain the risk of
losing value as inflation picked up speed.
An October 2011 Citigroup analysis found domestic banks
would be among the most likely buyers. Banks normally manage
some of their cash using bond coupons and swaps, which combined
are about as liquid as Treasury floaters would be.
"We think the Treasury can probably issue floating rate
notes and create a new market segment," the Citi note said.
"There is sufficient risk premium in term securities to make
this a worthwhile exercise for them."
Floaters would also ease the burden money market funds have
been under since the 2008 financial crisis. New regulations
imposed after a large money fund "broke the buck" in September
2008 have restricted products they can buy. They now have to
keep more cash in shorter-term vehicles.
Deborah Cunningham, executive vice president and chief
investment officer at Federated Investors in Pittsburgh, said
money funds would enthusiastically buy floaters.
After writing a slew of comment letters expressing deep
concerns over proposed new regulations for money funds,
Cunningham said she and her team were "diligently" working on a
comment describing the benefits of Treasury floaters.
"It's definitely a different tone," she said, explaining
that Treasury floaters would count as securities with very short
maturities -- since their "maturity" date would be counted as
the date on which their interest rate resets, not the date the
actual security completely matures.
That would reduce the price volatility of the securities. A
money fund could use the steadier prices to more easily maintain
its net asset value of $1.
"To be able to do that in a Treasury fund would be hugely
beneficial," she said.
The Treasury has been contemplating issuing floaters for
several months. During the department's Feb. 1 quarterly
refunding announcement, Assistant Treasury Secretary Mary Miller
said official discussions were ongoing.
The Treasury Borrowing Advisory Committee's report ahead of
the last refunding said floaters looked "extremely attractive"
in the context of a decline in available high-quality global
government bonds as well as rising demand for safe assets.
In a notice published in the Federal Register, the Treasury
stressed it has not yet made a decision.
But it asked a series of detailed questions about how market
participants thought such a note should be structured and set a
deadline of April 18 to respond. The next Treasury quarterly
refunding announcement is set for May 2.