Tim Duy is bullish on the idea
In short, I think the US Treasury has good reason to consider adding floating rate debt – and should find a ready buyer not only in Wall Street, but just across town.
The US government already has floating rate debt. Its called T-Bills. When the your 13-weeks is up you simply issue/buy some more.
Unless I am missing something here the only real advantage to a floating rate long bond is transactions costs. You only have to sell/buy it once rather than 4 times every year.
Also, on a related note, there are no savings to be had from the federal government locking in low rates now. Not unless the government knows something about Fed policy the market doesn’t or is deliberately attempting to manipulate Fed policy.
This is because long rates simply are the market’s best guess at the path of short rates plus a slight risk premium and at this point option value because short rates can rise but they cannot fall.
Thus it ought to be the case that borrowing over a longer term increases the government’s borrowing costs.
What it does though is lower the government’s exposure to interest rate risk. I am not sure this is a huge deal or even a good idea, but if its what you want then you do get that.
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Tuesday ~ October 25th, 2011 at 6:40 am
Tuesday 7atSeven: the need to chase | Abnormal Returns
[...] Who are the ready buyers of the proposed floating-rate Treasury notes? (Economist’s View also Modeled Behavior) [...]
Tuesday ~ October 25th, 2011 at 7:11 am
q
it doesn’t lower the govt’s exposure to interest rate risk at all. it’s equivalent to rolling over short term debt over and over again. what it does do is reduce transaction costs and remove liquidity risk.