The U.S. Treasury in its "August 2013 Quarterly Refunding Statement of Assistant Secretary Rutherford announced the details of its Floating Rate Note (FRN) program. The statement says, "Treasury published in the Federal Register today a final rule for the Floating Rate Note (FRN) program. The FRN is the first new product that Treasury has introduced since TIPS over 15 years ago. As indicated at the May Quarterly Refunding, the FRN will complement our existing suite of securities and help Treasury achieve its objective of financing the government at the lowest cost over time. Treasury anticipates that the first FRN auction will occur in January 2014. This timeframe should provide sufficient time for market participants to adjust analytical systems and operational processes to accommodate the new product. Treasury will provide additional information regarding the potential sizes for the first auction of FRNs at the November Quarterly Refunding."
The Treasury's Auction Regulations says on the new "Floating Rate Notes," "On July 31, 2013, Treasury published a Final Rule to accommodate the auction and issuance of floating rate notes. In addition, the amendment makes certain technical clarifications and conforming changes. Treasury has provided a list of Frequently Asked Questions and a Term Sheet that summarizes key provisions and features of these securities."
It adds, "On December 5, 2012, Treasury published an Advance Notice of Proposed Rulemaking (ANPR) soliciting comments on the potential issuance of Treasury floating rate securities. The ANPR requested comments by January 22, 2013 on the design details, terms and conditions, and any other relevant issues. View comment letters. On March 19, 2012, Treasury published a Notice and Request for Information asking for comments by April 18, 2012 on the potential issuance of Treasury floating rate notes. View comment letters."
The Final Rule for the "Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds," explains, "This final rule amends Treasury's marketable securities auction rules to accommodate the public offering of a new type of marketable security with a floating rate interest payment. In addition, the amendment makes certain technical clarifications and conforming changes."
At our recent Money Fund Symposium, the Treasury's Assistant Secretary for Financial Markets, Matt Rutherford, commented (which we quoted in our July Money Fund Intelligence), "Of course Treasury has a very keen interest in well-functioning treasury markets, including the very short end of the curve and our bill market. Our monitoring of market functioning obviously involves studying asset prices movement but it also involves significant communications with market participants such as yourselves.... This is critically important, having an active dialog with dealers and investors, to understand what's happening on a daily basis, and it really is a key input into our debt management strategy."
He told the Baltimore audience, "And as many of you know the broad contours of that strategy really haven't changed since 2009. We remain on a path to continue to extend the weighted average maturity of our debt. At the depths of the financial crisis this figure was right around 48 months, and today it has risen to about 65 months. Given the uncertainty in fiscal forecasts we don't explicitly set a target for where we expect the average maturity to go to. However, I would say that I expect a gradual increase in the average maturity in over the next several years. As you know, extending the WAM of our debt has led to a decline in the stock of Treasury bills. In fact, bills have fallen from their high of $2.1 trillion during the financial crisis to their current level of right around $1.6 trillion. As a percentage of the portfolio, bills have fallen to just under 15%."
Rutherford commented on FRNs, "We understand the importance of well-functioning money markets, and in that spirit we are building a floating rate note program and this will mark the first new security the Fed has offered since TIPS were introduced back in 1997. Our goals here are very straightforward. We'd like to offer the market a high-quality, low duration instrument, such as T-bills, with a longer tenor. At first we'll be simply r`eplacing some T-bill issuance with floating rate notes <b:>`_, so those will not add any increments of interest rates into our portfolio. But going forward there will be another tool in our tool kit, which everyone could agree is important given the financing uncertainties that we face."
