US plans to issue floating rate debt

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The Treasury Department is expected to announce on Wednesday whether it will begin issuing a new type of federal debt for the first time in 15 years – a reflection of the global interest in storing money in the United States and the willingness of the United States. government to avoid unexpected disruptions in its borrowing capacity.

The Treasury plans to follow the advice of Wall Street traders by introducing a type of investment known as a floating rate note. The note would allow the government to borrow money for a fixed period – say, two years – while paying a variable interest rate.

For global investors, the new note would help meet demand for an ultra-safe place to store money at a time when the availability of other safe investments has declined. The sovereign debt crisis in Europe and the poor balance sheet of other fixed income securities during the financial crisis prompted investors to place their liquidity in US government securities.

As a result, public debt rates have remained extremely low despite the country’s skyrocketing bonds and the political deadlock in Washington that led Standard & Poor’s analysts in August to downgrade the US credit rating.

“The structural decline in the stock of high-quality global government bonds, coupled with an increase in demand for non-volatile liquid assets, is expected to make US government-issued FRNs extremely attractive,” investors wrote this year. of the Treasury Borrowing Advisory Committee.

The Treasury renews tens of billions of dollars in debt per month, making it vulnerable to temporary disruptions in the economy. Longer-term securities, such as floating rate notes, would reduce this vulnerability by reducing the amount of debt that must be rolled over at any given time.

The issue was highlighted in August when some members of Congress threatened not to increase the federal borrowing limit. Treasury officials were concerned at the time that they would not be able to renew a $ 100 billion debt. At the last moment, Congress raised the debt ceiling.

Not all analysts think it makes sense to introduce the new titles. Duke University International Trade Professor Campbell R. Harvey said it was a bad idea because interest rates could easily rise in the future from their historic lows.

“It is true that floats would be cheaper for the government today – but I emphasize the word ‘today.’ The actual cost of floats depends on future interest rates,” he said in an email “It comes down to what you expect? For me, the chance that rates will go up is far greater than the chance that they’ll go down or stay the same.”

The Treasury issues debt securities only for specified periods that bear fixed interest rates. There are treasury bills (which last less than a year), notes (between one year and 10 years) and bonds (more than 10 years). The Treasury pays a higher rate of interest when it borrows money for longer periods.

The floating rate note would allow the Treasury to simultaneously reap the benefits of paying a lower interest rate and locking in money for a longer period.

For example, on Tuesday the Treasury paid an interest rate of 0.09% on a three-month Treasury bill. He pays an interest rate of 0.27 percent on a two-year note. Analysts say they expect the Treasury to pay about 0.17% interest on a two-year floating rate note, based on Tuesday’s figures.

The Treasury last introduced a new type of debt in 1997, Treasury Inflation-Protected Security. The instrument allowed investors to receive interest in addition to inflation, ensuring that the gains were real. It turned out to be very popular.


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