Treasury Will Issue Its First Floaters On January 29, 2014

As was long predicted and foreshadowed (and analyzed here previously with the proposed FRN term sheet shown half a year ago), after nearly two years of foreplay with the idea of issuing inflation-friendly floating rate notes, moments ago as part of its refunding announcement, the Treasury announced the first floater issuance in history would take place on January 29, 2014, will have a 2 year tenor, and will amount to between $10 and $15 billion.

From the press release:

Floating Rate Notes (FRNs)

 

Treasury intends to announce the details of the initial Floating Rate Note (FRN) auction on Thursday, January 23, 2014, with the first auction occurring on Wednesday, January 29, 2014. Settlement of the security will occur on Friday, January 31, 2014.

 

The FRN is the first new product that Treasury has brought to market in 17 years.  The FRN will have a maturity of two years and Treasury anticipates that the size of the first auction will be between $10 and $15 billion. 

 

Specific terms and conditions of each FRN issue, including the auction date, issue date, and public offering amount, will be announced prior to each auction.  For more details about the new Treasury FRN product, including a term sheet, FRN auction rules, and Frequently Asked Question, please see:

 

http://www.treasurydirect.gov/instit/statreg/auctreg/auctreg.htm

 

In addition, a tentative auction calendar that includes Treasury FRNs can be found at:

 

http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Pages/default.aspx

As the TSY further adds in its refunding presentation, in 2014 FRN issuance is expected to amount to $105 billion, or 14% of the total $730 billion in project net borrowings (this number will change), and 20% in 2015 before "tapering" subsequently. Why? Unclear - perhaps by then the expected inflation that was the reason for the arrival of FRNs will be gone...

As posted previously, here is what the Treasury proposes for an indicative FRN term sheet:

 

Away from the topic of FRNs, the TSY also indicated it will offer $70 billion in new paper to refund $63.5 billion, for net new cash proceeds of $6.5 billion. Recall that a few days ago, the Treasury announced it would increase its cash build by a whopping $60 billion in the quarter, hoping to leave it with $140 billion in total cash by December 31. Which begs the question: is the Treasury, in order to keep net collateral roughly flat in light of no Fed monetizing, now simply issuing more gross debt to build up cash with the proceeds? If so, this would mean that the Treasury and the Fed which is monetizing the bulk of its issuance, have reached a level of synchronicity unseen before, all of it simply to preserve the upward ramp in stocks.

Finally, and as largely expected, the Treasury once again reminded Congress to fix itself promptly (i.e., ignore the enabling impact of the Fed), and to lift the debt ceiling ahead of February 7, 2014.

Debt Limit

 

The debt limit places a limitation on the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.  Raising the debt limit does not authorize new spending commitments; it simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

 

The Continuing Appropriations Act, 2014 suspended the debt limit through February 7, 2014.  A new debt limit will be calculated on February 8, 2014 in the manner prescribed by the Act.  At that time, Treasury will have extraordinary measures available, which will allow the government to continue to finance its obligations for a period of time.

 

During the recent debt limit impasse, concerns that the debt limit would not be increased before extraordinary measures were exhausted led to significant disruptions in the secondary market for short-dated Treasury securities and a measurable increase in borrowing costs for newly issued Treasury bills.  As such, Treasury respectfully urges Congress to provide certainty and stability to the economy and financial markets by acting to raise the debt limit well before February 7, 2014.

Good luck with getting a functioning congress as long as the Fed is around.