Treasury May Let Investors Pay to Hold U.S. Debt

Markets Reuters

The U.S. government may ask investors to pay for the privilege and safety of holding short-term debt issued by its Treasury Department.

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In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity, might have to pay a premium for it.

Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.

Remarkably, Wall Street is asking to be able to pay a premium for U.S. debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.

"It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible," according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for U.S. government securities.

The European debt crisis and worry about global prospects is fueling investor demand for safe assets like short-term U.S. government debt. Treasury said modifying its auction rules would require overcoming "operational issues" but they were related to accounting rather than to legal questions.

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The Treasury has sold four-week bills with a zero percent rate several times in recent months. One-month bills traded with a negative yield on the secondary market in December, according to Reuters data.

Treasury yields this low may also become a long-term fixture in U.S. markets after the Federal Reserve promised to keep borrowing costs exceptionally low until at least late 2014.

A decision on a policy change could come in May.

At a press conference following announcement of quarterly refunding auctions next week, Assistant Treasury Secretary Mary Miller said it would take some changes in Treasury's systems for handling the debt that it presents to markets.

"As you know, Treasury bills don't have coupons, they're issued at discounts. This would be the opposite case, where a Treasury bill would be issued at a premium, maturing at par," she said.

"So it would require making some changes to the systems to allow that type of pricing and discount becoming a premium exercise."

When debt is issued at a discount, the investor's return is the difference between the purchase price and the amount received at maturity. When the debt is sold at a premium, the amount the investor receives at maturity is less than the amount paid at auction, meaning the investor has paid to own the risk-free debt.

FRNS ALSO IN VIEW

The Treasury announced it will sell $72 billion of three-year, 10-year and 30-year debt securities next week at its quarterly refunding sales, raising $22.4 billion of new cash.

"Treasury believes that the current issuance schedule and offering size for notes and bonds are adequate to address forecasted borrowing needs over the near term," Miller said.

On Monday, Treasury said that it expects to issue $444 billion in net marketable debt over the course of the January-March quarter and $200 billion in the April-June quarter.

Miller said Treasury also "continues to study the possibility of issuing Floating Rate Notes (FRNs)" and would announce a decision at the May refunding. A Treasury official said the 21 primary dealers who are part of a committee that advises Treasury on market conditions made a strong case in favor of floating rate notes.

The official said that, at this point, it was not looking at the potential issue of ultra-long bonds of 50 years or more and instead preferred the idea of floating-rate notes.

The borrowing advisors felt that a decline in available global high-quality government bonds as well as rising demand for safe assets would make U.S. government-issued floating-rate notes "extremely attractive" to investors.

Miller said Treasury was having no difficulty selling the debt that raises money for the government's day-to-day needs.

"There continues to be strong domestic and international demand for Treasuries," she said "The contacts I have with market participants suggest there is just an unshaken faith in U.S. Treasuries, and there's a lot of confidence  in our debt issuance, in our country, in the decisions we are making."

In response to questions, she said the government should be able to get close to the end of the year before it risks hitting the $16.394 trillion legally set debt limit. Some private-sector analysts question that, suggesting that the government could hit the limit again in November, potentially reigniting a sensitive issue in the same month that presidential elections occur.

On Tuesday, the nonpartisan Congressional Budget Office said the United States was headed for a fourth straight year of $1 trillion-plus budget deficits, a condition that Republicans want to use as ammunition to hammer President Barack Obama's spending record in the November voting.

(Reporting By Glenn Somerville and Mark Felsenthal; Editing by Burton Frierson and Andrea Ricci)

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