WASHINGTON (MNI) – The following is the MNI transcript of
Wednesday’s quarterly refunding news conference, led by Under Secretary
For Domestic Finance Mary Miller and including Deputy Assistant
Secretary For Federal Finance Matthew Rutherford and Director of the
Office of Debt Management Colin Kim:

(Questions may be paraphrased.)

Miller: Reads quarterly refunding public announcement.

Q: Has Fed’s Operation Twist caused any strains?

Miller: I’m not seeing any signs of strain in the market. We’ve
certainly seen strong coverage in our primary issuance of Treasury
securities. Interest rates have remained at low levels. So I could not
say that I’m seeing any strains in the market. Matt or Colin?

Q: To follow up, the advisory committee mentioned Operation Twist.
How does that work:

Miller: The Maturity Extension Program that the Fed is engaged in
means that they are outright selling short-term Treasury securities that
they hold in their own portfolio and they’re not rolling over maturing
securities that they hold. So as we’ve moved through the auction process
there’s a portion of our auctions that may be taken up when the Federal
Reserve rolls over existing holdings. If they’re not doing that we need
to make up that purchase by issuing more securities in the public
market.

This plays out gradually over a period of years so we’ve been able
to accommodate that change.

Q: On floating rate notes, wondering why now? Any risks on the
horizon?

Miller: As you know we’ve been talking about this for some time and
the Treasury moves quite deliberately when we’re making a decision for a
new product, so we spend quite a bit of time talking about it. I think
that floating rate notes can satisfy two issues that we see in the
market today. One if the demand for high-quality short-term collateral.
We note that our Treasury bill auctions are very heavily subscribed for.
And we know that in a world where there is a demand for higher quality
collateral to meet new banking regulations, new demand for highly liquid
securities. This could meet a certain amount of demand in the market. We
also know that we have been trying to extend the maturity of the
outstanding Treasury debt and a floating rate note allows us to issue a
term security but with a short-term-like cash feature of a floating rate
that is adjusted with short-term rates. Any other comments from my
colleagues here?

Kim: This allows us to satisfy …

Q: But you don’t see any risks?

Miller: That’s the second part of your question. I mean I think
there is always a certain amount of risk of introducing a new product.
So we want to do this very carefully with a lot of lead time and a lot
of market participation to make sure that we develop something that will
meet strong demand. I think the risk you might be signaling is the risk
of rising interest rates and having a floating rate security. I would
say that at the Treasury we face that risk with every security that we
issue and in particular with Treasury bills that we roll over
regularly are always subject to movements of interest rates. We do not
try to time markets or to time interest rates so we think this product
makes sense over all market cycles whether rate are rising or falling,
that it is a complement to securities that we offer today that will
merely add another tool in the toolkit, if you will, to finance the
government.

Q: At what stage are you at?

Miller: Sure. Well, we’re just beginning. We’re announcing today
that we’re going to build the capability to do this. And I think what we
need to do is each time we put out, perhaps, quarterly refunding
statements is to provide an update on timing. As you can imagine, it is
not a small thing to change the systems to allow floating rate
securities. And we are going to work very closely with the Federal
Reserve that is our agent in these matters. And as we get more precision
about timing, and completion and readiness, we’ll put that out there.

Q: Mid 2013?

Miller: I think it would be a mistake to try to provide that much
certainty about when this will be ready because we’re just beginning.

Q: Can you provide a time frame on negative rate bidding?

Miller: Well I may ask Matt and Colin to jump in on this one as
well. It is a less difficult change, as I understand it, than developing
something like Treasury inflation protected securities or a floating
rate note program. I think what we’re signalling is we think it’s
probably prudent for us and the market to prepare themselves in the
event that we need to have a negative rate bidding capability. How long
it would take to do that I’m not exactly sure.

Rutherford: I think it’s a period of months, not years. And I think
that we just want to have the option if we need to take that decision
later on to be able to … .

Q: With the floating rate notes is it fair to say that Treasury
general collateral is kind of the consensus for an index right now?

Miller: I think that’s one of the ideas that’s been floated. As
you’ve noted earlier, we have a group called the Treasury Borrowing
Advisory Committee that is a group of private sector participants in
markets and we’ve asked them to think about different reference rates
that a floating rate can float off of. That was one of the ones that was
suggested. I think that’s an area we want to devote more time to looking
at the various options.

Q: Have a question about the fiscal cliff. Why don’t you provide
any more information to the markets about that. Are you expecting it
will be at the next refinancing in October that you will talk about what
will happen if the legislation that is already on the books goes into
effect with no changes.

Miller: In what vein are you asking? From a Treasury debt
management perspective?

Q: In January government borrowing will go down because spending
will go down. There will be that fiscal cliff and won’t that impact
Treasury markets and your offering sizes?

Miller: Right now, what we’re putting out is our expected borrowing
for the next two quarters. I think that at the next refunding auction we
might have more visibility into the first quarter. But as you are well
aware there is a lot of uncertainty in terms of what’s going to be
adopted or changed before year-end. So I think it’s probably wise to
wait and to see what unfolds over the next quarter and then we’ll give
you as much information as we can about that. But we don’t have the
facts yet to try to size borrowing in the first quarter of calendar
2013.

Q: A few weeks ago there was a record direct
bid on 10-year Treasuries and it caused some speculation in the market
on how it might affect market operation. Did it have any effect on your
ability to sell bonds?

Miller: We don’t ever comment on the specific participants in
auctions. There was an auction that did have a high direct bid
participation but it did not affect the outcome of the auction. It went
very smoothly. We were able to sell the amount we were raising without
any incident.

Q: Is it accurate to say it was not raised in the TBAC meeting?

Rutherford: We provided information about two weeks afterward about
who actually bought the bonds, as we always do. So you can look at those
categories and derive who was actually behind it, at least at the high
level.

Q: So you’re referring to that spike?

Rutherford: I’m talking about the investor-class data that
references that 10-year note auction you’re talking about.

Q: You haven’t changed the debt-ceiling timeline? OMB estimated you
would be within about $200 billion of the ceiling by the end of this
fiscal year. Do you agree with that timing?

Miller: Our timing is that we expect we probably will reach the
debt ceiling by the end of the year and you can sort of look at our
borrowing needs and what we’re doing over the next two quarters. I think
it’s broadly in line with what OMB is saying.

Q: Just to clarify historically, if the floating rate note is to be
issued this will be the first time?

Miller: That’s my recollection. We have some historians in the room
here but if anyone knows differently, we can talk afterwards about this
but this is the first time we’ve structured a note just this way.

Kim: Thanks, everyone.

–Editor: Denny Gulino, denny@marketnews.com 202-371-9464

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MNUAU$,MFU$$$,MCU$$$,M$$FI$]