Money markets us floating rate notes may pressure bill rates lower

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* Treasury may announce floating rate notes on Weds * Questions remain over structure of any floating rate program * 3-month dollar, euro Libor rates unchanged on the day By Chris Reese NEW YORK, May 1 The U.S. Treasury may announce on Wednesday it will issue floating-rate Treasury notes in a move that could put downward pressure on short-term Treasury bill rates, analysts said on Tuesday. The Treasury has been in discussions with the financial community over the mechanics of issuing the notes, which would have a floating interest rate rather than a fixed rate like current Treasury debt, and could announce the program as soon as Wednesday when it gives details on its upcoming quarterly refunding needs. Such floating-rate issuance, initially expected to have maturities of 18 months to two years, could potentially put upward pressure on Treasury bill prices if it replaces a portion of the Treasury's normal bill issuance, analysts said. "We will have to see what gets reduced, if anything, to make room for these notes. The question is what gets replaced," said Josh Stiles, managing director at IDEAglobal in New York. The Treasury has been moving to extend the duration of its debt. If the floating rate notes issuance replaces other debt issuance it is expected to come at the expense of shorter-dated securities like Treasury bills, which would mean tighter supply in the bills market. While the Treasury could announce such a floating rate program on Wednesday, many questions remain over how the issuance would be structured. "It is kind of hard to say" if such a floating-rate program would impact the bills market, said Thomas Simons, money market economist at Jefferies & Co in New York. "We don't know what kind of maturities they would be offering, we don't know what the reference rate would be, so it is difficult to gauge the demand for such a product without knowing any of the parameters and we have to kind of surmise where the demand would be cannibalized from existing Treasury offerings." The Treasury is pondering issuing the floating-rate notes as part of an effort to prepare for any eventual slowdown in foreign purchases of the massive amounts of new U.S. debt, said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets in New York. "This is contingency planning so that if foreign buying slows a bit and we still have these massive deficits to finance, then you want to bring in every new potential buyer you possibly can, and by issuing floaters you may be able to bring in new investors that wouldn't have otherwise bought Treasuries," Cloherty said. "The argument here is not that this is going to be a cheap source of financing in 2013, the argument is that you are diversifying your investor base for the years to come when the ability to sell all of these Treasuries may become more challenging," he said. DOLLAR LIBOR STEADY Separately, euro three-month London Interbank Offered Rates (Libor) fixed at 0.63686 percent on Tuesday, which was unchanged from Wednesday, while three-month dollar Libor fixed at 0.46585 percent, which was also unchanged on the day. Dollar Libor has been trading in a very narrow range around 0.47 percent since early March, which Simons said may have to do with European banks being better capitalized since the European Central Bank pumped nearly a trillion euros of cash into the financial system in December and February.