By Joseph Plocek
WASHINGTON (MNI) – Despite the U.S. Treasury Department’s official
protestations that no decision has been taken yet on whether to sell
floating-rate notes, market sources say the 27 pages of “discussion
charts” devoted to them, released after the February refunding, and
ongoing questions about them mean a positive decision is coming soon,
perhaps at the refunding announcement May 2.
But official sources told MNI FRNs at this time might be a bad idea
forced on them by dealers anxious for another instrument to market.
There are four main reasons FRNs are not seen as efficient.
First, interest rates are near record lows. Indeed, the Treasury
may decide to accept negative yields in bill auctions, and at times in
the recent past bills have traded negative in the secondary market.
Dealers estimated in the refunding report that a FRN yield,
depending on the terms of the note, could be around 8 basis points
higher than the 3-month bill rate. “Lose-lose” is what one official
terms this math.
Second, dealers told the Treasury that FRNs are a way to increase
the average maturity of the debt. One source said this argument makes no
sense at all for the Treasury.
He said the reason a public entity extends is rollover risk. But
the Treasury never has had a problem rolling bills, given that there are
large, liquid auctions each week.
Third, the reason cited for extending the maturity structure is to
make interest costs a less volatile budget outlay. FRNs do not
accomplish this goal, and in fact, floating a rate by definition means
more volatility and thus the Treasury should not view them as a
substitute for long-term fixed debt.
Last, a source told MNI no lesser light than Lawrence Summers
rejected the idea of FRNs when he was Treasury Secretary, especially
after he was advised that the yield on FRNs would be above the bill
rate.
–email: jplocek@marketnews.com, Tel. 202-371-2121
** MNI Washington Bureau: (202) 371-2121 **
[TOPICS: M$$FI$,M$U$$$,MAUDS$]