The Treasury Department is set to choose whether to issue floating-rate debt for the first time in later this week. Unlike other Treasury instruments which have fixed interest rates, floaters issue coupons that move higher or lower depending on the bond market. Analysts believe that the Treasury will agree to issuing floaters which will mark the first addition in 15 years of a debt instrument to the Treasury’s arsenal.
This likely move comes at an unusual time as analysts predict that interest rates cannot fall much further. This pits the Treasury on the opposite side of households and corporations who are trying to lock in record-low interest rates. Nevertheless, from the Treasury perspective, it has validity. The floating rate notes would not necessarily increase government’s exposure to volatility to short-term interest rates. The Treasury is already exposed to short-term interest rate swings since they issue new bills weekly. By selling 2-year floaters, the Treasury can decrease the number of 3-month bills issued weekly thus the Treasury will need to conduct less auctions. Experts expect the demand for this security to be very high as potential investors like financial institutions, money market mutual funds, and state and local governments are looking park their cash in high-quality, safe assets.
- Ravi Tamboli