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Department of the Treasury Bureau of the Public Debt Government Securities Regulations Staff 799 9th Street NW Washington, DC 20220
Mizuho Securities USA Inc. (“MSUSA”) appreciates the opportunity to comment on issuance of Floating Rate Notes (“Treasury FRNs”) by the U.S. Department of the Treasury (“Treasury”).
As a Primary Dealer, MSUSA has significant experience making markets in U.S. government securities to institutional investors. In addition, MSUSA is a leading market maker in Corporate Floating Rate Notes.
MSUSA believes that Treasury FRNs should leverage existing broad-based acceptance and transparency of the T-bill market by referencing Treasury FRNs to the weekly 13-week auction stop out rate. The drivers behind this recommendation include:
The existing active market for T-bill floaters with an established set of market conventions with
The long established and transparent issuance and price discovery of the underlying base index
The likelihood that a new Treasury floater based on this index will increase the importance of T-
As to an alternative option of using Repo as an index, there are drawbacks. A significant hurdle would be gaining investor acceptance for the creation of a new product category based on a broad-based index that currently does not exist. Thus, investors may be slower to adopt this product based on the introduction of two variables rather than one. An additional consideration is that Repo would expose the Treasury and investors to potential dislocations in the repo market that could be driven by exogenous factors which most likely would be reflected in an additional risk premium for Repo-based Floaters.
The following are our recommendations and comments related to product structure and issuance strategy for Treasury FRNs.
Weekly reset is consistent with established market convention and will lead to the greatest level of
transparency and appeal to the greatest number of market participants.
Frequency of Interest Payments
Quarterly payment is consistent with established market convention.
7 days prior to the interest rate payment date
Minimum Interest Rate
A floor rate should be set to zero. Additionally, a minimum coupon of 0.125% should be instituted to
allow the bonds trade at a premium. “If” the index set is less than zero (and the spread does not produce a
product equaling a positive interest rate), the securities should be issued at a rate of zero (a premium
given the 0.125% coupon restraint). This will ensure that investors do not have to remit payment back to
Spreads should be allowed to clear at market levels with the zero interest rate barrier constraint factored
into the auction process.
“Actual / Actual”
Auction Frequency and Settlement
Auctions for floating rate Treasury debt should be held monthly as part of Treasury’s regular debt
program. Settlement for newly auctioned notes should be on or near the 15th to best match investor cash
We believe that floating rate notes should be issued monthly and should not be reopened on a regular
Initial Coupon Setting
Initial coupon setting should be the index rate in effect two New York business days prior to the
settlement date. This will require a change in “Section 356.24 (c)” to reflect the need to establish the
initial rate setting on the Fed Wire prior to settlement.
Utilization of “discount margin” bidding for re-openings of securities with previously established spreads
is appropriate. We do, however, differ in opinion about regularly scheduling re-openings. The “discount
margin” calculation illustrated in appendix B in the Treasury proposal is appropriate and consistent with market convention.
Two years. However, success of two year maturity bonds will not necessarily yield insight into future
demand and/or spread behavior for longer maturities.
Initial investor interest will support new issue sizes up to $20 Billion per month if issued as T-bill FRN.
We would be pleased to discuss any of our comments or recommendations.
Sincerely, Gerald Rizzieri Executive Managing Director Fixed Income Division Head
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