U.S. Auction of Floating-Rate Notes Draws Strong Demand

U.S. Auction of Floating-Rate Notes Draws Strong Demand
By Dow Jones Business News, January 29, 2014, 01:25:00 PM EDT


Investors piled into the first auction of a new type of U.S. government debt Wednesday that pays investors more as interest rates rise.

The robust demand shows investors are eager to protect their fixed-income investments amid expectations for rates to climb higher as the Federal Reserve pulls back its stimulus from the bond markets and after Treasury bond yields have risen from historic lows over the past year. When bond yields rise, their prices fall.

The $15 billion sale of two-year floating-rate notes was offered with an extra yield of 0.045 percentage points above the yield of three-month T-bills as of Monday. The premium to the three-month T-bills is lower than investors had expected, signaling bidding was more aggressive than Wall Street dealers had predicted.

Investors bid for 5.67 times the amount of debt on offer. Foreign investors comprised 37.8% of the total bidding. U.S. investment firms and other direct bidders comprised 8.9% of the total.
"The first FRN auction looks to have been a success," said Thomas Simons, vice president and money-market economist in the fixed-income group at Jefferies LLC.

The auction happened on a day when Treasury bonds in general have attracted investors seeking a safe place to park cash after emerging-market countries' failed attempts over the past couple of days to shore up their currencies. The Federal Reserve Open Market Committee also concludes a two-day meeting Wednesday and is expected to announce another pullback from its bond-buying stimulus program at 2 p.m. EST.

The yield on the 10-year Treasury note fell to 2.711% in recent trading Wednesday, from 2.75% late Tuesday.

For now, most Treasury notes and bonds pay investors a fixed interest rate over the course of their maturities. Holders are vulnerable to potential losses when interest rates rise because these bond prices will fall.

"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."

Investors also 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 floating interest. Among regular issuers of such securities are the government-backed mortgage companies Fannie Mae and Freddie Mac. Other governments such as the U.K. and Italy long have issued floating-rate debt.
Traders said money-market funds, especially those specializing in U.S. government bonds, will be big buyers of Treasury floating-rate notes going forward.

Floating-rate notes are an attractive alternative to T-bills, or Treasury debt due in a year or less. Money funds have been a major buyer of T-bills as they are required to hold short-term and highly liquid assets.

The yield on the Treasury floating-rate notes will be set based on the weekly yield set in auctions of three-month T- bills. The money funds can garner some extra yield by allocating money to floating-rate notes. Some funds also may like that they can avoid frequently rolling over their T-bill investments. Instead they can lock in investments in floating- rate notes for two years.

Floating-rate notes also will be a good option for foreign central banks, another main market participant in the T- bill market, analysts said.

Traders and analysts are optimistic over the longer-term outlook of floating-rate notes. They believe demand will pick up speed in coming months as the Treasury sells more such debt and the market will become more liquid over time.

The Treasury said in a release last Thursday 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.


Read more: http://www.nasdaq.com/article/us-auction-of-floatingrate-notes-draws-strong-demand-20140129-00848#ixzz2ruF5MG1h