* U.S. Treasury studying new debt products
* Trying to woo investors in low-rate environment
* Wall Street enthusiastic, advises short term at first
By Glenn Somerville and Jason Lange
WASHINGTON, May 2 The U.S. Treasury Department
sees a strong market for floating-rate notes that would give it
a new tool for managing the government's borrowing needs but is
putting off a decision for now on selling them, a senior
official said on Wednesday.
Financial markets were watching for the Treasury to announce
at a scheduled quarterly refunding press conference that it
would begin issuing floating-rate debt. But it said it was still
analyzing feedback and wouldn't say when it will decide.
Floating-rate notes would attract investors who want to be
sure they don't miss out if general interest rates start to move
up and they would be a wholly new product to pitch for the
Treasury, which does not currently offer this type of debt
Most feedback has been positive, said Matthew Rutherford,
acting assistant Treasury secretary for financial markets, but
Treasury was moving gradually and deliberately. "Treasury will
announce its conclusion about issuance...at a later date, after
our analysis had been completed," the Treasury said in a
At a press conference, Rutherford was asked to explain why
the Treasury was mulling floating-rate debt at this time. Some
analysts have noted that with interest rates near rock-bottom,
the most likely general direction is upward, meaning that
borrowing costs for the government would rise.
"We have been talking about looking at new products for
about a year, well, for about 15 months now," he said. "The
consistent feedback that we've gotten from the marketplace is
that floating-rate notes could potentially be something that
would be additive to Treasury's mix of offerings."
He added: "There's quite a bit of demand for high-quality,
low-duration instruments in the system. So I think that most
people think that this is going to be something that, if we
decided to pursue it, would be very well received."
A Treasury official noted that as government-sponsored
enterprises Fannie Mae and Freddie Mac - both of which were
taken over by the government during the 2007-2009 financial
crisis and are expected to be wound down - issue less floating
debt, there may be more room in markets to sell it.
The Treasury comments on floating-rate debt came as it
announced a $72-billion quarterly refunding of three-year,
10-year and 30-year debt securities to take place next week.
Those sales will raise about $35.3 billion of new cash for the
A committee of top Wall Street firms advises Treasury ahead
of the quarterly refunding sales on market conditions. It
recommended that if Treasury proceeds with floating-rate notes -
which would be the first new type of debt offering in 15 years -
it should keep them to two years' maturity or less.
One unresolved issue is what reference index to use as a tie
for a floating rate. Treasury advisors were divided over whether
to use the short-term Treasury bills rate, the federal funds
effective rate or a Treasury general collateral rate.
Market reaction to Treasury's refunding announcement, which
was well within expectations, was muted and there was little
surprise that it was moving cautiously on floating-rate notes.
"I don't think they want to rush into anything," said Chris
Ahrens, interest-rate strategist at UBS in Stamford,
Connecticut. "I don't think it (the floating-rate notes) would
make a significant dent on their financing needs."
STILL CONSIDERING NEGATIVE RATE AUCTIONS
In response to questions, Rutherford said the government
also was still considering negative yield auctions but hasn't
decided whether to initiate them or not.
At its last refunding announcement in February, the Treasury
said it was looking at the possibility of holding such auctions
in the face of robust demand for U.S. government-backed debt, a
move that would effectively make investors pay for the privilege
of holding U.S. debt securities.
Near the turn of the year, some Treasury bills trading in
the secondary market were paying negative yields and some
four-week bill auctions produced a high rate of zero percent.
Rutherford noted there were problems with maintaining an
"artificial floor at zero," one of them being that the
government - and therefore taxpayers - would be paying more than
it needed to if investors were willing to accept negative yields
as the price to pay for the safety of Treasuries in times of
The Treasury said it expected to keep its note and bond
auction sizes stable in coming months and said it was still
assessing how much money flowed into its coffers during this
year's tax season. April 17 was the deadline for individuals to
pay their taxes from 2011.