US Treasury to Offer Floating Rate Notes

The US Treasury has announced plans to begin offering floating rate notes, which will be its first new product since the launch in 1997 of Treasury inflation-protected securities (TIPS).

“Treasury plans to develop a floating rate note programme to complement the existing suite of securities issued and to support our broader debt management objectives,” the department said in a statement. Treasury officials added that the new issue is unlikely to take place before late 2013, reflecting the time needed to change auction systems, determine an index for the note and work out other details.

However, once available the floating rate notes could be in demand from corporate treasurers who wish to increase yields on their cash with safe, liquid investments. Capital and liquidity requirements resulting from the 2010 overhaul of financial regulation in the Dodd-Frank Act, and from the Basel III global rules, have increased demand for short-term, high-quality debt at a time when supply is scarcer.

“We know that in a world where there is demand for higher quality collateral to meet new banking regulations, new demand for highly liquid securities, this could meet a certain amount of demand in the market,” said Mary Miller, the Treasury’s undersecretary for domestic finance.

With the US budget deficit for 2012 currently estimated at US$1.21 trillion, the Treasury is seeking to widen its base of investors, and the notes may appeal to those who are wishing to protect themselves from a possible increase in interest rates, or from inflation resulting from the Federal Reserve’s economic stimulus. Forthcoming changes to bank deposits and money market funds (MMFs) will enhance their attractiveness, according to Anthony Carfang, founding partner of adviser Treasury Strategies.

The Treasury had previously considered the possibility of introducing a floating rate note. The Treasury Borrowing Advisory Committee (TBAC), whose members include executives from major US banks and bond investors, recommended the idea earlier this year but there was a lack of consensus on the best way to set the variable interest rate.

The TBAC now appears to favour using rates set in the market for repurchase agreements (repos) as measured by the General Collateral Finance (GCF) repo index as the floating rate benchmark.

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