In another stunning disply of cluelessness Treasury is going to issue floating rate notes in January.
For those unfamiliar with flaoting rate notes they are securities whose interest rate periodically adjusts to some benchmark, like Libor or a T-Bill rate. Usually they have a maturity of anywhere from two to five years. The securities the Treasury will sell are going to be 2-year notes with the interest rate pegged to a T-Bill rate.
Functionally a floating rate note is exactly the same things as the Treasury rolling over a 2-year Treasury note or something similar.
So the question is, why would the government sell floating rate notes when there has never been a problem with rolling over maturing debt, ever, and where the rate is set by the government (Fed) and the payment of any interest is simply a matter of crediting bank accounts?
To give you an example, so far this fiscal year (one month), Treasury has "rolled over" $5 TRILLION. That is not a typo. It's correct: Five T-R-I-L-L-I-O-N. Here is the data. (See Table III-A Redemptions.)
If you can roll over $5 TRILLION every month and you've been doing that, forever, what do you need floating rate notes for?
And by the way...$5 TRILLION per month is about what it comes down to because for the entire FY 2013 Treasury rolled over $62 TRILLION.
$62 TRILLION. Rolled over. In one year. And no spiking interest rates, debt collapse, hyperinflation and the world didn't come to an end. Furthermore, these figures are from the Treasury itself. These idiots apparently don't even look at their own numbers, because if they did they'd know that they don't have to conjure up some brand new security to be able to "entice" investors to buy government debt. There's no enticing. The whole floating rate note scheme is just a big, giant, admission that the guys driving the bus are totally lost.
I never hear Warren Mosler curse, but he called the people at Treasury "morons." That's, like, as bad as you're ever going to hear coming from Warren, believe me.
But the slur is deserved. Morons indeed.
The Treasury’s real mistake is that interest rates are currently low, and can hardly go any lower. So they could have borrowed at a low rate for a few years. Instead, they’ve exposed themselves to possibly paying a higher rate in a year or two if rates go up in a year or two’s time. Or have I missed something?
ReplyDeleteMaybe this helps the Fed with their QE exit strategy....
ReplyDeleteIf they buy these floaters, then if they raise rates this part of the portfolio immediately has an increased coupon and they for sure avoid having to go to Congress for an appropriation to pay the ior and avoid their dreaded 'negative equity' under which the Paul-tards will say they are 'bankrupt'...
Rsp
Breaking: neoliberal dictatorship invades in the ERT building!
ReplyDeletehttp://failedevolution.blogspot.gr/2013/11/breaking-neoliberal-dictatorship.html
I think so Ralph... this policy indicates that they dont know what the heck is even going on...
ReplyDeleteI think this whole idea came out of the TBAC report here press release from yesterday:
" The Committee also recommended that Treasury move forward with the inaugural auction of $10 to 15 billion of 2 year maturity Floating Rate Notes, which the Committee views as a substitute for Treasury bill issuance, with the flexibility for longer maturities as the market develops."
http://www.treasury.gov/press-center/press-releases/Pages/jl2206.aspx
This idea from the:
" from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association"
So here we have the "Wall St" cohort "advising" the Treasury how to structure their issues... to now include floaters... whatever...
It just indicates that these govt sector rubes at Treasury cannot see who is in charge (or rather supposed to be in charge I guess...) so they have the lines of authority all screwed up... embarrassing...)
rsp,
I don't get what Treasury is trying to achieve by issuing FRNs. What's the difference between buying a 2 year floating rate note that resets every 3 months and simply buying a 3-month T-bill and rolling it over every 3 months for 2 years?
ReplyDeleteIt might make sense if FRN issuance was intended to replace long term fixed rate debt and in effect add to the supply T-bills. This would be moving in the direction of Warren's advice for Treasury to only sell T-bills. This would probably help bring long term interest rates down which would compliment alleged Fed aims in QE1,2,3 & 4EVA. Problem is it comes about 4-5 years too late.
However, as Matt points out from the TBAC report... "The Committee also recommended that Treasury move forward with the inaugural auction of $10 to 15 billion of 2 year maturity Floating Rate Notes, which the Committee views as a substitute for Treasury bill issuance, with the flexibility for longer maturities as the market develops."
Maybe Wall Street favors FRN issuance because the commission structure is more rewarding?
Look at who the Chair of TBAC is. Dana Emery. She's head of Fixed Income at Dodge and Cox. In a recent interview she spouts all the out-of-paradigm nonsense such as "rates are unsustainably low," etc.
ReplyDeleteWhy are we letting these fools dictate to Treasury what it should do with OUR MONEY!!!
@Mike or Matt,
ReplyDeleteDo you know what the daily $250 billion rollover of nonmarketable government account series is?
To Ralph's comment: "So they could have borrowed at a lower rate…instead, they've exposed themselves to possibly pay a higher rate..."
ReplyDeleteWhy even talk about the government "borrowing" at lower or higher rates like that's an issue? Since there is no solvency constraint, it doesn't matter if rates are low or high for the currency sovereign… it can borrow at any rate, and there's no worry about not being able to pay it back, etc.
The rate at which the currency sovereign borrows is meaningless, except to the extent that it relfects added deficit spending via higher interest-income for Treasury holders.
Am I missing something here?