US delays introduction of floating rate notes The US has delayed moves to diversify government financing amid disagreement between bond investors over how to introduce securities that would pay a floating rate of interest. The Treasury on Wednesday put off the formal introduction of floating rate notes, as it emerged that representatives from big banks and investment firms "uniformly divided" on what benchmark the first new government securities since 1997 should use. In its quarterly debt refunding announcement, the Treasury said it was still analysing feedback from banks and institutional investors about introducing Treasury securities with a floating interest rate that would rise and fall over time. It subsequently said it was not likely to introduce the new securities until 2013. Floating rate notes are seen as important because they would help the US diversify its options for funding budget deficits in the coming decade. The securities are expected to have maturities of between one- and two-years initially, but extend towards five-years later. They are viewed as likely to attract sizeable interest from banks and investors in the light of proposed regulatory changes that require tougher capital standards and more use of collateral. So-called "floaters" would also appeal to investors in an environment of rising interest rates, and particularly to banks that hold large amounts of US Treasuries to meet higher capital standards. But a fierce debate over what rate should be the floating reference or benchmark for the securities is impeding their introduction. Dealers advising the Treasury have been unable to decide on short-term Treasury bills, the Federal Funds rate or the Treasury general collateral - or repo - rate. A bond market advisory group told the Treasury at its quarterly meeting this week that they had not reached consensus over which rate to use for notes. Minutes from the meeting of the Treasury Borrowing Advisory Committee, which consists of representatives from 13 banks and investment firms, said there had been an "active discussion" and that the committee was "still undecided on the appropriate reference index." Its members were "uniformly divided" and further work was needed. The use of the Federal Funds rate could be risky given the central bank's overnight rate may become volatile way when monetary policy is eventually tightened. That leaves a choice between T-bills, which have traded at negative rates in recent years, or the general collateral rate used for borrowing Treasuries in the repo market. "Bills are a more widely used reference rate in the market, and would be the safe choice for the Treasury," said Lou Crandall, economist at Wrightson Icap. He said it was too early to use the government collateral repo index recently created by the Depository Trust & Clearing Corp. "The index is attractive in theory, but it doesn't have a long track record yet and the market is just beginning to trade financial instruments tied to it," said Mr Crandall. Repo-linked floaters would be a gamble for the Treasury at this point. In a recent letter to Treasury, Fidelity Investments said using the repo index for floating notes "would appeal to money market mutual funds and other investors with broad investment mandates and not just those funds that invest primarily in government securities."