Treasury will offer floating-rate securities

By Martin Crutsinger AP Economics Writer WASHINGTON (AP) -- The Treasury Department said Wednesday that it will offer investors Treasury securities with variable interest rates, similar to those on some home mortgages. Officials said actual sale of the new type of securities is at a least a year away because of the time needed to modify government computer systems to handle the floating-rate securities. Treasury said it will continue to study a second unconventional way to sell government debt that would offer negative yields. Investors would, in effect, pay the government for the privilege of socking their money in ultra-safe Treasurys. No decision has been made yet on whether to proceed with negative-yield securities. Global investors have been shifting money into Treasurys out of fear of other types of securities, especially those linked to Europe's debt crisis. This higher demand has helped drive down Treasury yields and made it cheaper for the U.S. government to borrow. That's a welcome development at a time when the government is financing record levels of deficits. Normally, the longer the maturity on a Treasury security, the higher the yield the government must pay. But the variable-rate Treasury would let the government pay an initially low rate even while borrowing for two years or more. Offering a variable rate would carry some risk for the government because it would have to pay investors more if rates rose. Many economists are forecasting that rates will rise in coming years once the economy begins growing at a faster pace and the Federal Reserve starts raising interest rates to keep inflation from being a problem. The government's decision to offer variable-rate securities represents officials' belief that the risk of paying higher rates in coming years is worth it because of the benefits received from attracting more investor demand initially. The move is expected to reduce the need for government to hold as many Treasury auctions. In February, a Treasury advisory committee urged the government to offer both variable- and negative-yield securities. Mortgage giants Fannie Mae and Freddie Mac have had success selling floating-rate securities. And some foreign governments, including Britain and Italy, have been big issuers of floating-rate debt. The last time the U.S. government issued a new type of Treasury was in 1997. That's when it introduced Treasury inflation-protected securities, or TIPS. Their yields are linked to inflation: When inflation rises, so do yields on TIPS. When inflation falls, their yields fall. Treasury said Thursday that it still expects to reach the current limit on government borrowing near the end of 2012. However, even after the debt ceiling is reached, Treasury said that it would have the authority to take various measures that would allow borrowing to continue "until early in 2013." Officials refused to provide more specific estimates on when the debt ceiling will be hit or how long they will be able to keep borrowing before Congress raises the debt ceiling. Treasury announced Wednesday that it plans to auction $72 billion in debt next week in its regular quarterly auction. Those auctions will be part of the government's plan to borrow $276 billion in the July-September quarter. A fourth straight $1 trillion-plus federal budget deficit is expected this year. Those deficits have raised the nation's annual borrowing needs to record levels. Published: Thu, Aug 2, 2012