Michael Mackenzie
US bond dealers and institutional investors have told the Treasury that they should allow debt sales at negative rates of interest.
The US Treasury plans to make a decision about allowing debt to be sold at negative rates by May, when the next quarterly debt refunding meeting is held with the Treasury Borrowing Advisory Committee. The Treasury also plans to announce whether it will sell floating rate notes, or FRNs, at this time.
Against the backdrop of high demand for short-term Treasury bills, the department?s weekly auctions have arrived at or just above zero per cent since the summer. On Monday, for example, the Treasury sold $33bn of four-week bills at 0.05 per cent and received orders totalling $163.02bn.
Since August, as the eurozone crisis has flared, bill yields have often traded below zero per cent in the secondary market.
Buying a Treasury bill at a negative rate of interest would equate to an investor paying the US government to hold their money for a short time, a sign of extreme cash hoarding.
Allowing negative yields at auctions could facilitate Treasury bills rates trading further below zero in times of stress, said a trader.
The large amount of bids for Treasury bills at recent auctions sparked a ?lengthy discussion?, said the committee in its latest report.
?It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function,? said the committee. ?The committee unanimously recommended that the Treasury department allow for negative-yield auction results as soon as logistically practical.?
According to the minutes of the meeting between the committee and the Treasury, Matthew Rutherford, deputy assistant Treasury secretary, said there were operational issues associated with such a rule change, but the hurdles were not insurmountable.
Since Treasury bills have been trading at negative rates in the secondary market, dealers and investors have altered their risk-management systems to account for negative rates.
Separately, the committee was unanimously in favour of the Treasury issuing FRNs and said: ?The structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make US government-issued FRNs extremely attractive.?
The Treasury also plans to sell $32bn three-year notes, $24bn in 10-year debt and $16bn 30-year bonds next week.