Saturday, May 5, 2012

U. S. Treasury Considers Issuing Short Term Variable Rate Debt - The Exact Opposite of What They Should Be Doing

Hey, Larry, Curly and Moe – Get Out of Washington, D. C.  – Please

When interest rates are very low investors like variable rate debt securities.  They are protected against losing out if rates increase, and because rates are low to begin with, the probability that rates will go lower and reduce their returns is very limited.  Borrowers, however end up with the risk that the rates will go higher and they will have to pay more in interest, without the corresponding benefit from interest rates going lower.

So who would give serious consideration in today’s interest rate climate to issuing short term variable rate notes?  Why your friendly, neighborhood gang of idiots, the U. S. Treasury.

Floating-rate notes would be the first addition to the Treasury's arsenal of products in 15 years, and could help the government finance its mounting debt. The department asked market participants for views on the notes in March.

But Treasury is not doing this on their own, they are getting advice from some of the smartest people in Finance, you know, the ones that nearly brought down the world financial markets with their management of financial markets in 2007 and the preceding years.

The Treasury Borrowing Advisory Committee unanimously recommended that Treasury introduce the product—with most members favoring a maturity of two years or less—but was divided on the best way to set the variable interest rate.

Yes, who is the Treasury Borrowing Advisory Committee?  Here they are, anybody recognize these names?

The 13-member advisory panel includes executives from some of Wall Street's largest banks and bond investors, such as Goldman Sachs Group Inc.,  J.P. Morgan Chase , Morgan Stanley  and the Pacific Investment Management Co., a unit of Allianz.  The group met Tuesday and minutes were released Wednesday.

So how low are rates that only big time bankers would be idiotic enough to suggest issuing variable rate securities?   This is telling.

Treasury is also weighing issuance of negative-yield debt, which would effectively have investors paying to let the government borrow their money.

Mr. Rutherford said there remain good reasons to issue such securities, though again there has been no decision.

The Treasury's current auction system doesn't allow debt with a negative yield to be sold in the primary market. In the secondary market, where investors trade Treasury securities among themselves, yields on short-term debt have in the past been negative. A discrepancy would mean the Treasury Department is losing out every time it sells securities with higher yields than the prevailing level in the market.

Mr. Rutherford said, "An artificial floor at zero could potentially lead to some disruption in auctions." Also, taxpayers could lose out if the Treasury were unable to issue securities at negative rates, he said.

It doesn’t take a financial genius to know that if interest rates are so close to zero that in some case they go negative, the chances of rates rising rather than falling is about as far away from zero as probability can get. What the Treasury should be doing is borrowing at fixed rates for 10 to 30 years, and locking in low interest rates in case Mitt Romney and the Republicans take over, cut taxes and run such huge deficits that nobody will lend to the U. S. unless rates rise substantially.  To recognize that policy of issuing longer term debt as being correct doesn't take a financial genius either.

Note to Wall Street:  Those Ivy League MBA’s may not be getting the education you think they are getting.

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