High Demand for Floating-Rate Treasury Notes

Bid-to-cover ratio for latest floater auction was 4.67, more than 50 percent higher than bid-to-cover on recent auctions of fixed-rate debt.

Floating-rate notes are proving to be a success, with the U.S. Treasury’s first new debt offering in 17 years being scooped up at auction by investors seeking an alternative money-market security.

The U.S. sold $13 billion of floaters yesterday at a bid-to-cover ratio, which gauges demand by comparing the amount of bids with the amount of securities offered, of 4.67, higher than the 2.9 average of fixed-rate debt sold this year by the government. It was the third sale since the inaugural floating-rate auction on Jan. 29.

The Treasury is seeking to extend the average maturity of its debt and cut the amount of outstanding short-term bills, which ballooned to $2.1 trillion during the the global financial crisis. The notes also offer protection against rising interest rates, with investors anticipating that the Federal Reserve is preparing to lift its benchmark rate from close to zero for the first time since 2008.

“It was a very fair auction,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of the Fed’s 22 primary dealers that bid at auctions. The bid-to-cover ratio, while down from the first two sales, “is still pretty high when compared to Treasury bill auctions. The Treasury should be happy overall, given the auctions have been going smoothly.”

The floaters were sold at a high discount margin of 0.069 percent, up from the 0.064 percent on Feb. 26. The bid-to-cover ratio almost matched that of a $25 billion sale of three-month bills on March 24 that drew a ratio of 4.61.

The notes, the first new U.S. government debt securities since Treasury Inflation-Protected Securities were introduced in 1997, are considered an alternative to bills because they’re benchmarked to a short-term security.

The Treasury also sold $35 billion in five-year notes yesterday at a bid-to-cover ratio of 2.99, the highest since September 2012. That compared with the 2.6 times average at the past 10 auctions. The notes yielded 1.715 percent, the highest since May 2011, compared with a forecast of 1.736 percent in a Bloomberg News survey of 10 primary dealers.

Indirect bidders, a class of investor that includes foreign central banks, bought 32.7 percent of the floating-rate notes, down from 39.7 percent at the February sale.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 4.3 percent of the floaters, compared with 5.7 percent in February.

The Treasury sold $32 billion of two-year fixed-rate debt on March 25 at a yield of 0.469 percent, the highest since May 2011. The U.S. will sell $29 billion of seven-year notes today.

When added to a $13 billion sale of 10-year Treasury Inflation Protected Securities on March 20, the auctions total $122 billion. They will raise $50.6 billion of new cash, as maturing securities held by the public total $71.4 billion, according to the Treasury.

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