UPDATE: Treasury Makes No Decision On Floating-Rate Notes

The U.S. Treasury said Wednesday it has not yet decided whether to start issuing floating-rate notes as it weighs comments from bankers and traders on the best way to structure the new product.

Floating-rate notes would be the first addition to the Treasury's arsenal of products in 15 years, and could help the government finance its mounting debt. The department asked market participants for views on the notes in March.

"Treasury is in the process of analyzing the feedback, and we continue to study the benefits and optimal terms of a Treasury [floating rate note]," Acting Assistant Secretary for Financial Markets Matthew Rutherford said in a statement.

The Treasury Borrowing Advisory Committee unanimously recommended that Treasury pursue the plan--with most members favoring a maturity of two years or less--but was divided on the best way to set the variable interest rate.

"There was a lack of consensus on the reference index, with respondents divided between Treasury bills, the federal funds effective rate, and a Treasury general collateral rate," minutes of the advisory committee meeting said. Four members favored T-bills, three general collateral and six federal funds effective.

The 13-member advisory panel includes executives from some of Wall Street's largest banks and bond investors, such as Goldman Sachs Group Inc. (GS), J.P. Morgan Chase & Co. (JPM), Morgan Stanley (MS) and the Pacific Investment Management Co. unit of Allianz SE (AZSEY, ALIZF, ALV.XE). The group met Tuesday and minutes were released Wednesday.

Treasury said it would conduct further analysis and announce a conclusion at a later date. It didn't specify a time frame, though the minutes showed that floating-rate notes could not be issued before 2013 because of limitations in the Treasury Department's system for issuing debt.

A Treasury official said that on balance feedback had been positive, and the department would try to make a decision as soon as practicable.

Treasury advisers said floating-rate notes would expand the Treasury's investor base and help extend the maturity of Treasury debt.

Rutherford's statement made no comment on potential issuance of negative-yield debt, which would effectively see investors pay to let the government borrow their money.

The Treasury official, who spoke on condition he not be named, said there remain good reasons to issue such debt. The minutes cited "several operational challenges" to a negative-yield product.

The Treasury's current auction system doesn't allow debt with a negative yield to be sold in the primary market. In the secondary market, where investors trade Treasury securities among themselves, yields on short-term debt have in the past been negative, though the official said they have not been persistently negative since the start of the year.

The discrepancy means the Treasury Department is effectively losing out every time it sells securities with higher yields than the prevailing level in the market.

The Treasury Borrowing Advisory Committee had agreed at a Jan. 31 meeting that the policy of not allowing negative yields at auction "was prohibiting proper market function."

--By Jeffrey Sparshott, Dow Jones Newswires; 202-862-9291; [e-mail]

--Matt Phillips contributed to this article.