Last November, the U.S. government announced plans to sell a
new type of debt that would pay more interest as market rates rise. The $15
billion sale of so-called floating rate notes, which took place on January 29th,
marked its first introduction of a new product since that of Treasury notes
that protect buyers against inflation in 1997.
The initial sale of these securities took place through an
auction in which investors bid for 5.67 times the amount of debt on offer. The
robust demand showed that investors are eager to protect their fixed-income
investments amid expectations that rates will climb as the Federal Reserve
pulls back its stimulus and after Treasury-bond yields have risen from historic
lows over the past year. When bond yields rise, their prices fall.
The sale is the latest sign that the U.S., with $11.6
trillion in marketable government debt outstanding, is seeking to expand its
borrowing options. In recent years the government has been seeking to extend
the length of its average debt maturity by selling more longer-term bonds, a
shift that locks in financing for a longer period but costs more relative to
near-zero short-term rates. In February 2011, a group of investors that advises
the government on market trends suggested the Treasury consider issuing
floating-rate notes. Since then the Treasury has been working out details.
Investors already have been buying up nongovernment assets
with floating interest rates over the past year. There are an estimated $300
billion in outstanding issues with varying interest rates. Among regular
issuers of such securities are the government-backed mortgage companies Fannie Mae and Freddie Mac. Governments such as the U.K. and Italy
long have issued floating-rate debt.
"There's
no doubt the auction went well," said Peter Yi, portfolio manager at
Northern Trust Corp. who oversees $240 billion of assets. The auction
"exhibited a lot of confidence in the U.S. Treasury," he said.
The Treasury said in a release before the January sale that it
expects to auction additional new floating-rate securities quarterly in April,
July and October with two sales of notes with existing maturities in the
subsequent months of each quarter. Floating-rate notes "bring additional
diversity to Treasury's current portfolio and help support our goal of saving
taxpayer dollars by financing the government's borrowing needs at the lowest
cost over time," said Under Secretary for Domestic Finance Mary J. Miller
in the news release.
Traders
and analysts also predicted that demand would pick up speed in coming months as
the Treasury sells more such debt and the market will become more liquid over
time.
"Demand
will continue to be high for floating-rate notes in a rising yield
environment," said Bridget Daugsiewicz, a money-market fund manager at
Manulife Asset Management in Boston. "The first sale is a good sign. For
money funds that invest in U.S. government debt, this is a good way to
diversify their holdings."
"As
secondary liquidity is proven and valuations become more attractive, for
liquidity minded strategies seeking same-day liquidity, Treasury [floating-rate
notes] will become a pillar of liquidity management,'' said Jerome Schneider,
head of the short-term and funding desk at Pacific Investment Management Co. in
Newport Beach, California, which has about $2 trillion under management.
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