US Treasury Planning to Offer Floating Rate Notes, Maybe Negative Bidding

In addition to comments on the debt limit, the US Treasury said this morning that it was working on a plan to offer floating interest rate notes in about another year. In the minutes of the Treasury Borrowing Advisory Committee (TBAC), a group of 14 representatives from some of the largest financial institutions in the country, discussed the Federal Reserve’s ‘Operation Twist’, which they called by its proper name, the Maturity Extension Program (MEP):

Committee members then debated the best way to fund the short-term effect of MEP. Some members noted that increasing coupon issuance to fund the MEP shortfall would be consistent with the Committee’s long standing recommendation to extend the weighted average maturity. Another member noted that bills would offer more flexibility because issuance sizes could be quickly increased or decreased, given the uncertainty around the fiscal cliff. Many members also noted the virtues of floating rate notes (FRNs). The members briefly discussed possible indexes for a Treasury FRN.

The problem is that Treasury now projects that it will need to increase its borrowing capacity by $425 billion to make up for a $400 billion lower borrowing limit and a $267 billion expenditure for the extension of Operation Twist through the end of this year. The Treasury Department plans to use the floating rate notes to help fill the gap.

And those negative interest rates:

A Committee member asked about the status of Treasury allowing negative rate bidding in bill auctions. Under Secretary Miller noted that Treasury is in the process of building the operational capabilities to allow for negative rate bidding in Treasury bill auctions, should this become necessary in the future. She also noted that no decision had been made to implement negative rate bidding at this time.

US Treasury Inflation-Protected Securities (TIPS) already carry negative rates, and have for some months. In fact, at the auction set for August 15th Treasury has increased its TIPS offerings by $2 billion, to $14 billion, the only change noted in coupons. Figuring out how to do this for all bill auctions shouldn’t be too difficult.

One thing is clear: the notes will not — repeat, not — be indexed to LIBOR rates. Some on the TBAC panel want the notes indexed to the Depository Trust and Clearing Corporation (DTCC) General Collateral Finance Repurchase Agreements, commonly called GCF Repos. For US Treasury securities, the GCF rate is currently 0.238%.

The full minutes of the TBAC meeting are available here and the committee’s membership roster is available here.

Paul Ausick