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U.S. Treasury to Sell $15 Billion in New Floating Notes (ZZ)

NEW YORK—The U.S. Treasury aims to auction $15 billion in new floating-rate notes next week, marking its first new product in 17 years, agency officials said Thursday.

The auction size comes in at the top of a previously guided $10 billion-to- $15 billion range, reflecting confidence in the demand the Treasury expects to draw for the new notes.

Results of the sale will be released shortly after 11:30 a.m. ET on Jan. 29. This will be the first new addition to the U.S. government's menu of debt offerings since inflation-protected Treasurys were introduced in January 1997.

"It is good to see some innovation, when markets like the ones we're in have fundamentally changed," said Christopher Proctor, a portfolio manager at OppenheimerFunds, who oversees a variety of cash and short-term strategies.

With the Federal Reserve buying a bulk of the Treasury supply though its bond-buying stimulus programs over the past five years, bond investors have struggled with waning yields. And now as the economy improves, many investors face rising yields that erode the value of their bondholdings.

Floating-rate notes would buffer some of those concerns.

Pricing of the new notes will be based off a yield spread over the rate on three-month Treasury bills, so as the bill yield rises, so will the rate on the two-year floater.

Some bond analysts expect the notes to offer about eight to nine basis points in extra yield. At the current 0.035% rate on three-month bills, that means an all-in yield of about 0.11% to 0.12%.

The new notes also come at a time the Treasury has been scaling back supply of shorter-dated debt, given reduced cash needs with a lower government deficit. That has meant a group of investors fighting for a shrinking pool of Treasurys.

"Pricing will be determined by the combination of limited supply and strong investor demand, given the opportunity to maintain Treasury exposure but earn a spread over bills," said the rate strategists at Bank of America Merrill Lynch.

The new notes are expected to be particularly attractive to conservative money-market funds, where money must be invested in high-quality and shorter-term securities.

Bank of America Merrill Lynch estimates these funds currently hold about $475 billion in short-dated Treasurys, a portion of which will naturally shift to the new floating-rate notes.

OppenheimerFunds' Mr. Proctor said the new notes can be an "attractive alternative" to fixed-rate Treasurys. He said if the spread is at least five basis points, he would consider buying these new notes for some of his strategies.

The Treasury expects to hold 12 floating-rate note auctions a year. Treasury expects the flexibility in interest-rate payments to broaden the appeal of U.S. debt, helping the government keep its funding costs low.

Write to Cynthia Lin at cynthia.lin@wsj.com and Josh Mitchell at joshua.mitchell@wsj.com