U.S. sees floating-rate note by 1Q 2014, lower coupon sizes

The U.S. Treasury Department said it plans a floating-rate note sale as early as the fourth quarter this year and signaled it may decide to “gradually” reduce coupon auction sizes.

In its quarterly refunding statement today, the Treasury said a final rule on the floating-rate note auction is planned for coming months, with a first sale estimated to occur either in the fourth quarter this year or the first quarter of 2014. The department said it will use the weekly high rate of 13-week Treasury bill auctions as the index for the notes.

With a budget deficit of more than $1 trillion last year, the Treasury needs to expand its base of investors. So-called floaters may appeal to those who are seeking to protect themselves from a possible increase in interest rates or faster inflation stemming from the Federal Reserve’s unprecedented monetary stimulus.

Guidance on FRNs “would give people more concrete road map on time frame on how this is going to play out,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, before the report. “Market participants are waiting for the final go ahead in making changes to their computer systems to accommodate floating-rate notes.”

The yield on 10-year Treasury notes stayed lower after the announcement, paying 1.64% compared with 1.67% late yesterday.

The floating-rate notes would be the first added U.S. government debt security since the Treasury Inflation-Protected Securities, known as TIPS, were introduced in 1997.

Auction Sizes

The Treasury will auction $72 billion of coupon securities next week, comprised of $32 billion in three-year notes on May 7; $24 billion in 10-year notes on May 8; and $16 billion in 30- year bonds on May 9. The Treasury has kept its quarterly refunding auctions unchanged at $72 billion since November 2010.

“Depending on how the fiscal situation develops, Treasury may decide to gradually decrease coupon auction sizes,” the department said in the statement.

The Treasury Borrowing Advisory Committee, the bond dealers and investors who meet quarterly with department officials, said in minutes of their meeting that it might be more prudent for the government to wait before deciding on adjusting financing.

Any reduction in the amount of coupon debt issued by the Treasury this year would cut the supply of bonds available for the Federal Reserve to purchase in their latest round of quantitative easing.

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